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Terms in this set (682)
Which of the following is most likely to be considered a Type 1 subsequent event?
A. A business combination completed after year-end, but for which negotiations began prior to year-end.
B. A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago.
C. Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.
D. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.
A. A business combination completed after year-end, but for which negotiations began prior to year-end.
B. A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago.
C. Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.
D. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.
An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
A. December 31, 20X8.
B. January 17, 20X9.
C. February 10, 20X9.
D. February 16, 20X9.
A. December 31, 20X8.
B. January 17, 20X9.
C. February 10, 20X9.
D. February 16, 20X9.
Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
A. Notify the board of directors that the auditor's report must no longer be associated with the financial statements.
B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
C. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements.
D. Issue revised pro forma financial statements taking into consideration the newly discovered information.
A. Notify the board of directors that the auditor's report must no longer be associated with the financial statements.
B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
C. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements.
D. Issue revised pro forma financial statements taking into consideration the newly discovered information.
Type 1 subsequent events require ______________ of the financial statements.
A. Adjustment
B. Consideration
C. Disclosure
D. Documentation
E. DuplicationA. AdjustmentType 2 subsequent events come into existence ______________ the balance sheet date.
A. After
B. Before
C. Between
D. Close to
E. Near
F. OnA. AfterType 2 subsequent events occur after the balance sheet date but __________ the completion of fieldwork.
A. After
B. Close to
C. Near to
D. Prior to
E. Subsequent toD. Prior toType 1 subsequent events come into existence due to new ___________ becoming available.
A. Auditors
B. Clients
C. Documentation
D. Evidence
E. JudgementD. EvidenceT/F
The auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client.TrueT/F
Amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts.TrueT/F
The representations letter from management should be dated and signed on the balance sheet date.FalseT/F
When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report.TrueT/F
Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and should return to complete the audit work on a later date.FalseManagement's written representations should be in the form of a letter addressed to:
A. The audit committee of the board of directors.
B. The stockholders of the entity.
C. The auditor.
D. The board of directors.C. The auditorIdentify the correct statement regarding analytical procedures used in a final review conducted at the conclusion of an audit.
A. The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit.
B. Typically, a junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required.
C. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
D. Analytical procedures used in the review near the conclusion of the audit are not required.C. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.Communicating which of the following to the audit committee is not typically required of an auditor?
A. Any disagreements with management.
B. Any significant reclassifying journal entries proposed as adjustments by the auditor.
C. The auditor's judgment of management integrity.
D. The process used by management to make accounting estimates.C. The auditor's judgement of management integrityWhen examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon:
A) determination of the amount of working capital at year-end.
B) the guidance provided by the FASB Statement on the statement of cash flows.
C) analysis of significant ratios of prior years as compared to the current year.
D) cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.DWhich of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
A) The company changed its capitalization policy for small tools in 200X.
B) An increase in property tax rates has not been recognized in the company's 200X accrual.
C) Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.
D) The cashier began lapping accounts receivable in 200X.AOverall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
A) revenue and expense account balances to the monthly reported net income.
B) income statement ratios to published industry averages.
C) revenue and expense account totals to the corresponding figures of the preceding years.
D) income statement ratios to balance sheet ratios.CThe primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
A) cutoffs.
B) transactions.
C) authorizations.
D) costs.BFor which of the following ledger accounts would the auditor be most likely to analyze the details?
A) Sales salaries expense.
B) Postage expense.
C) Supplies expense.
D) Miscellaneous expense.DAn example of an internal control weakness is to assign to a supervisor the responsibility for:
A) authorizing payroll checks for terminated employees.
B) reviewing and approving time reports for subordinate employees.
C) initiating requests for salary adjustments for subordinate employees.
D) distributing payroll checks to subordinate employees.DWhich of the following best describes proper internal control over payroll?
A) The payment of cash to employees should be replaced with payment by checks.
B) The duties of hiring, payroll computation, and payment to employees should be segregated.
C) The confidentiality of employee payroll data should be carefully protected to prevent fraud.
D) The preparation of the payroll must be under the control of the personnel department.BA surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
A) all unclaimed payroll checks are properly returned to the cashier.
B) all employees have in their possession proper employee identification.
C) names on the company payroll are those of bona fide employees presently on the job.
D) the paymaster is not involved in the distribution of payroll checks.CThe date of the management representation letter should coincide 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.CAuditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
A) the next scheduled interim visit.
B) the auditors' report.
C) the final billing for audit services rendered.
D) a postdated footnote.BA client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
A) A major subsidiary was sold on February 7.
B) The client decided to change depreciation methods in the coming year.
C) The factory building was damaged by a fire on January 19.
D) A substantial portion of the company's inventory was written off as obsolete on January 31.DIn connection with the annual audit, which of the following is not a "subsequent events" procedure?
A) Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.
B) Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.
C) Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings.
D) Review available interim financial statements.ATests of revenue and expenses often involve analytical procedures.TrueThe auditors generally perform an analysis of the miscellaneous revenue account to determine the nature of the items recorded to the account.TrueBudgets are an important internal control over revenue and expenses.TruePayroll frauds are easier to conceal today than they were in the past.FalseFor effective internal control over payroll, the personnel department should prepare the payroll records and checks.FalseMaintaining records of attendance of employees for payroll should be performed by the employees' supervisors.TrueThe payroll department of a company should sign and distribute company paychecks.FalseMaking payroll expenditures from an imprest payroll bank account ordinarily is a strength relating to internal control, rather than a weakness.TrueUnclaimed payroll checks should be returned to the payroll department for safekeeping.FalseA surprise observation of the distribution of paychecks is designed to detect employees that are paid for more hours than they worked.FalseThe auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client.TrueBusiness segment information required by the FASB is supplementary and need not be audited to provide a basis for an opinion on the client's financial statements.FalseAmounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts.TrueThe representations letter from management should be dated and signed on the balance sheet date.FalseWhen a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report.TrueDisclosure checklists are used to test the completeness of audit working papers.FalseThe auditors should accumulate known, projected, and other estimated misstatements in the financial statements to determine whether an unmodified opinion should be issued on the financial statements.TrueThe auditors generally perform review procedures on FASB-required supplementary information.TrueAll information included in a financial report prepared and submitted by the auditors should be audited.FalseThe loss of an account receivable because of a major customer declaring bankruptcy subsequent to the balance sheet date might or might not require adjustment of the financial statements, depending upon the cause of the customer's bankruptcy.TrueSubsequent events, which provide additional evidence regarding conditions existing at the balance sheet date, may result in adjustment of the financial statements.TrueThe financial statements should not be adjusted for subsequent events that provide important evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date.TrueCPAs have no responsibility to perform audit procedures after the date of their report but should still investigate events that are brought to their attention and might have affected their report.TrueDual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and should return to complete the audit work on a later date.FalseWhen examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon:
cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.
determination of the amount of working capital at year-end.
the guidance provided by the FASB Statement on the statement of cash flows.
analysis of significant ratios of prior years as compared to the current year.cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
The company changed its capitalization policy for small tools in 200X.
The cashier began lapping accounts receivable in 200X.
An increase in property tax rates has not been recognized in the company's 200X accrual.
Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.The company changed its capitalization policy for small tools in 200XOverall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
income statement ratios to balance sheet ratios.
income statement ratios to published industry averages.
revenue and expense account totals to the corresponding figures of the preceding years.
revenue and expense account balances to the monthly reported net income.revenue and expense account totals to the corresponding figures of the preceding yearsThe primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
cutoffs.
authorizations.
transactions.
costs.transactionsFor which of the following ledger accounts would the auditor be most likely to analyze the details?
Postage expense.
Miscellaneous expense.
Supplies expense.
Sales salaries expense.Miscellaneous expenseAn example of an internal control weakness is to assign to a supervisor the responsibility for:
authorizing payroll checks for terminated employees.
distributing payroll checks to subordinate employees.
initiating requests for salary adjustments for subordinate employees.
reviewing and approving time reports for subordinate employees.distributing payroll checks to subordinate employeesWhich of the following best describes proper internal control over payroll?
The payment of cash to employees should be replaced with payment by checks.
The confidentiality of employee payroll data should be carefully protected to prevent fraud.
The duties of hiring, payroll computation, and payment to employees should be segregated.
The preparation of the payroll must be under the control of the personnel department.The duties of hiring, payroll computation, and payment to employees should be segregatedA surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
all employees have in their possession proper employee identification.
all unclaimed payroll checks are properly returned to the cashier.
the paymaster is not involved in the distribution of payroll checks.
names on the company payroll are those of bona fide employees presently on the job.names on the company payroll are those of bona fide employees presently on the jobThe date of the management representation letter should coincide with the:
date of the auditor's report.
date of the latest subsequent event referred to in the notes to the financial statements.
balance sheet date.
date of the engagement agreement.date of the auditor's reportAuditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
the auditors' report.
a postdated footnote.
the final billing for audit services rendered.
the next scheduled interim visit.the auditors' reportA client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
The factory building was damaged by a fire on January 19.
A major subsidiary was sold on February 7.
A substantial portion of the company's inventory was written off as obsolete on January 31.
The client decided to change depreciation methods in the coming year.A substantial portion of the company's inventory was written off as obsolete on January 31In connection with the annual audit, which of the following is not a "subsequent events" procedure?
Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.
Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.
Review available interim financial statements.
Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings.Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.1) The human resources and payroll cycle is the transaction cycle that begins with
A) processing the payment to the employees.
B) the creation of the employee profile in the payroll master file.
C) the employee performing work for the company.
D) the hiring of personnel.D2) Which of the following describes the class of transactions associated with payroll?
A) posting costs of purchasing inventory
B) payment of employee services
C) payment of withholding taxes and benefits
D) writing off damaged inventory dropped by employeesB3) In most audits, the amounts of the balance sheet accounts related to payroll are
A) large and require substantial effort to audit.
B) small compared with the transactions.
C) large on the liability side but small on the asset side.
D) significantly larger than the related accounts on the income statement.B4) Which is the only one class of transaction relating to the payroll cycle?
A) receiving of goods
B) obtaining of service
C) receipt of cash
D) salesB5) Payroll and personnel costs at ABC Manufacturing are a major expense. This means that improper allocation or misclassification of labour costs could result in
A) a material misstatement of net income.
B) a net effect that is negligible when costing inventory.
C) quality control problems with respect to the production of finished products.
D) incorrect payment of payroll to employees.A6) The human resources department would likely provide which of the following internal controls for the human resources and payroll cycle?
A) recalculation of net pay for every pay
B) independent verification of wage rate
C) account for the continuity of employee numbers
D) account for the continuity of payroll check numbersB7) Which of the following is an example of semi-permanent information that would be included in personnel records?
A) gross pay for the monthly pay issued in September
B) net pay for the weekly pay issued in the first week of October
C) category of job the person is employed in
D) income tax deducted for the current payC8) Otto decided to outsource the payroll function to Magna Plus. For the purpose of an assurance engagement, Magna is considered a
A) service organization.
B) user entity.
C) payroll administrator.
D) human resource company.A9) If there is an error in wage rates, such errors can typically escalate into material amounts. What characteristic of the human resources and payroll cycle causes this?
A) many repeated transactions
B) the presence of independent verification
C) the use of outsourcing organizations for payroll
D) an error in the starting cheque number in a cheque runA10) Which of the following is not a major risk in the payroll cycle?
A) paying fictitious employees
B) incorrect accounting of costs and expenses
C) overpayment for time and production
D) paying employees more than the market rateD11) General controls must be evaluated and their impact considered upon the human resources and payroll transaction cycle because
A) there are frequently weaknesses in internal controls in the payroll cycle.
B) automated techniques are normally used to prepare and post payroll transactions.
C) the best way to test payroll transactions is usually by using test data.
D) the best way to test payroll transactions is usually by using generalized audit software.B12) Which of the following type of test is most important for the audit of payroll?
A) internal control
B) test of detail
C) analytical review
D) substantive testA13) Which of the following controls helps to prevent error with set up of access rights, and also helps to prevent unauthorized changes to the access rights?
A) independent comparison to check that they have been set up properly
B) access rights forms that are signed by the user's manager
C) tracking all accesses in an access log by user identification code
D) using audit software to provide a list of who has accessed sensitive dataA14) The most important control in the payroll cycle is clear, proper documentation of the employees job responsibilities and wages by the appropriate level of authority. This control is associated with which audit objective?
A) completeness
B) classification
C) valuation
D) occurrenceD15) Which of the following best describes proper internal control over payroll?
A) Preparation of the payroll must be under the control of the personnel department.
B) Confidentiality of employee payroll data should be carefully protected to prevent fraud.
C) Duties of hiring, payroll computation, and payment to employees should be segregated.
D) Payment by cheque to employees should be replaced with payment by automatic deposits.C16) Master file data is the semi-permanent data in an employee's file. Changes to the master file
A) should be adequately supported.
B) should be checked by the originator.
C) would be entered only once per month.
D) would be implemented on an annual basis.A17) The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the
A) payroll master file.
B) payroll transaction file.
C) payroll journal.
D) job time ticket.A18) A wage rate form that also documents a change in job responsibility for one of the warehouse employees should be approved by
A) human resources and the corporate controller.
B) the warehouse supervisor and human resources.
C) the warehouse supervisor.
D) human resources.B19) Ricky recently changed jobs from payroll analyst to assistant regional manager of production. An employee at the production facility came to see Ricky and complained that he was not paid on the last payroll cheque for the overtime he had done. Ricky apologized for this mistake and logged into the payroll system to modify the next paycheque for the employee to ensure that he would be paid for the additional hours. Which of the following statements correctly applies to this scenario?
A) The company did not properly allocate access rights.
B) The company did not properly complete the access rights approval form.
C) The company did not properly check employee background when they hired Ricky.
D) Ricky did not do anything wrong since the employee had worked the hours.A20) Access rights management is important because it is the organization's method of
A) establishing data tables usage.
B) identifying master file data.
C) identifying transaction file data.
D) enforcing segregation of duties.D21) When manufacturing labour affects inventory valuation, a knowledgeable manager should approve wage rate allocations to make sure that labour is distributed to the proper accounts. Which of the following controls helps to prevent error in the resulting job costing?
A) comparison of wage rates to the authorized payroll master file
B) independent comparison of the approved amounts to the data entered
C) continuity check of the payroll cheque numbers issued
D) reconciliation of gross pay on the payroll register with gross pay according to the payroll master fileB22) Which of the following controls best prevents employees from checking in for more than one employee?
A) use of numerically controlled punch-in cards
B) placing the punch clock in full view of the receptionist
C) time cards stored in a wall rack
D) a personalized swipe cardD23) Which of the following controls could help to prevent unauthorized overtime?
A) review by payroll supervisor of a report that lists all employees whose wage rate does not match the permanent file
B) print a gap report for all employees who have not submitted their time reports for the current pay period
C) review by payroll supervisor of a report that lists all employees working more than the required hours per week
D) have a calculation check for payroll calculations (gross pay less deductions = net pay)C24) To minimize the opportunity for fraud, unclaimed salary cheques should be
A) immediately returned for redeposit.
B) kept in the payroll department.
C) left with the employee's supervisor.
D) held for the employee in the personnel department.A25) A weak internal control system allows a foreman to clock in daily for a fictitious employee and to approve the time card at the end of the payroll period. This fraud would be detected if other controls were in place, such as having an independent party
A) compare the date of the recorded cheque in the payroll journal with the date on the cancelled cheques and time cards.
B) foot the payroll journal and trace postings to the general ledger and the payroll master file.
C) recompute hours worked from time cards.
D) distribute paycheques.D26) Which of the following controls prevents error and helps to ensure that only authorized wages are paid by the payroll service provider?
A) duplicate signatures required on payments to the Receiver General
B) use of an imprest payroll account for the payment of all payroll payments
C) independent approval of the payroll journal prior to payroll payment release
D) reconciliation of the payroll imprest bank account on a timely basisC27) The careful and timely preparation of all payroll withholdings and employer's portion of withholdings is necessary to avoid heavy fines. The most important control in the timely preparation of these returns is
A) computerized preparation of income tax returns.
B) a well-defined set of policies that indicate when each form must be filed.
C) independent verification of computer output by a competent individual.
D) a Gantt chart.B28) The auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing, as a part of the auditor's responsibility for
A) understanding internal controls.
B) doing tests of controls.
C) doing analytical procedures.
D) doing tests of balances.A29) The internal auditor is running a computer-assisted audit test that compares names and wage rates in the personnel files (stored on optical disk) with the wage rates in the payroll master file and the whole year's payroll transaction files. What is the purpose of these tests?
A) to determine whether any employees were not paid in the most recent pay
B) to check for wage rates that are under the amount specified by the union contract
C) to help with the reconciliation of wage rates to the T4 summary
D) to determine whether terminated employees are still being paidD30) To test whether the client has fulfilled its legal obligation in submitting payments for all payroll withholdings, the auditor must first
A) contact client's independent legal counsel.
B) know the dates when tax payments are due.
C) trace these payments to the imprest payroll account.
D) determine the client's requirements for submitting the payments.D31) When labour is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning
A) proper classification of transactions.
B) authorization of wage rates.
C) fictitious employees.
D) completeness of recorded transactions.A32) Otto decided to outsource the payroll function to Magna Plus. The controller of Otto should still
A) recalculate the payroll and its remittance to ensure accuracy.
B) review and authorize each individual payment to employees.
C) review the payroll journal and compare the total hours worked with the payroll time records.
D) inquire with the manager of Magna Plus if they suspect any unusual transactions.C33) When examining payroll transactions, an auditor is primarily concerned with the possibility of
A) overpayments and unauthorized payments.
B) posting of gross payroll amounts to incorrect salary expense accounts.
C) misfootings of employee time records.
D) excess withholding of amounts required to be withheld.A34) "Recorded payroll payments are for work actually performed by existing employees" is the control objective of
A) authorization.
B) completeness.
C) occurrence.
D) accuracy.C35) Which of the following controls will help to detect unauthorized changes to payroll master files and help to detect whether terminated employees are still being paid?
A) use of authorized change forms
B) periodic review of master files
C) use of master files to print T4s
D) use of master files to print payroll chequesB36) Which of the following is a test of controls?
A) reviewing the payroll journal, general ledger, and payroll earnings records for large or unusual amounts
B) examining time cards for indication of supervisor approval
C) comparing cancelled cheques with payroll journal for name, amount, and date
D) examining cancelled cheques for proper endorsementB37) Which of the following internal control tests would assist in satisfying the occurrence transaction-related audit objective for payroll?
A) examining payroll records for evidence of approval
B) proving the payroll bank reconciliation
C) reviewing the chart of accounts
D) accounting for a sequence of payroll chequesA38) Which of the following internal controls helps ensure that recorded payroll payments are for work actually performed by existing employees?
A) procedures requiring the recording of transactions as soon as possible
B) only valid employees from the computer data files are accepted for processing
C) internal verification of payroll file contents
D) independent preparation of payroll bank reconciliationB39) "Existing payroll transactions are recorded" is the control objective of
A) authorization.
B) completeness.
C) existence.
D) accuracy.B40) Which of the following internal controls would help ensure that existing payroll transactions are recorded?
A) time records are approved by supervisors
B) a time clock is used to record time
C) independent preparation of payroll bank reconciliation
D) comparison of payroll master file totals with general ledger control accountC41) Which of the following tests of controls would pertain to whether existing payroll transactions are recorded?
A) Compare cancelled cheques with payroll journal details.
B) Compare cancelled cheques with payroll records.
C) Foot the payroll journal and trace details to the general ledger.
D) Conduct gap testing for a sequence of payroll cheques.D42) "Recorded payroll transactions are for the amount of time actually worked and at the proper pay ratewithholdings are properly calculated" relates to which control objective?
A) authorization
B) completeness
C) existence
D) accuracyD43) Which of the following internal controls would assist in ensuring that recorded payroll transactions are for the amount of time actually worked and at the proper pay rate, and that withholdings are properly calculated?
A) comparison of batch totals with computer summary reports
B) comparison of payroll master file with payroll general ledger totals
C) adequate personnel files
D) separation of duties between personnel, timekeeping, and payroll disbursementsA44) Recomputing hours worked from time records provides evidence that
A) internal controls relating to payroll disbursements were operating effectively.
B) payroll cheques were signed by an appropriate officer independent of the payroll preparation process.
C) only bona fide employees worked and their pay was properly computed.
D) employees worked the number of hours for which their pay was computed.D45) Which of the following internal control tests would be used in assessing that recorded payroll transactions are for the amount of time actually worked and at the proper pay rate, and that withholdings are properly calculated?
A) Foot the payroll journal and trace to the general ledger.
B) Prove the bank reconciliation.
C) Recompute gross pay.
D) Review the payroll journal for large or unusual amounts.C46) Which of the following internal control tests would help to assess whether payroll transactions were properly classified?
A) Test clerical accuracy by footing the payroll journal.
B) Recompute net pay and gross pay.
C) Reconcile the disbursements in the payroll journal with the payroll bank statement.
D) Review time records and job records, tracing to labour distribution.D47) Which of the following internal control tests would help to assess whether payroll transactions were recorded on the correct dates?
A) Compare cancelled cheques with payroll journal for name, amount, and date.
B) Compare date on cheque with date the cheque cleared the bank.
C) Compare cancelled cheques with personnel records.
D) Recompute hours worked from pay records.B48) Which of the following is a substantive test of transactions?
A) Review personnel policies.
B) Account for a sequence of payroll cheques.
C) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
D) Examine printouts of transactions rejected by the computer as having invalid employee numbers.C49) Which of the following is most likely to approve changes in pay rates and deductions from employee salaries?
A) controller
B) personnel department
C) treasurer
D) payroll departmentB50) In auditing the imprest payroll account, which of the following procedures will take the least amount of auditor time?
A) tests of controls
B) risk analysis and obtaining an understanding of controls
C) analytical procedures
D) tests of details of balancesD51) A form issued for each employee summarizing the earnings record for the calendar year is the
A) rate authorization form.
B) summary payroll report.
C) payroll master file.
D) T4 form.D52) An important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the
A) consistent accrual of these liabilities relative to those of the preceding year.
B) actual expense incurred for the prior period.
C) amount expended to date in the current period.
D) profitability of the client, which will enable these liabilities to be met.A53) Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount
A) in the expense account.
B) used in the prior period.
C) authorized and recorded in the minutes of the board of directors.
D) paid in the subsequent period.C54) The auditor's primary concern in testing payroll liabilities is to make sure that
A) expense has not been overstated, thus reducing profits.
B) there are no understated or omitted accruals.
C) employees' T4 slips are accurate.
D) salaries of officers have not been misclassified as wages.B55) When auditing the human resources and payroll cycle, the auditor should verify the officers' compensation because
A) officers are more likely to commit fraud.
B) officers' compensation is likely more prone to error.
C) some officers may have complex compensation packages.
D) some officers may be in a position to pay themselves more than the authorized amounts.D56) The correct cutoff and valuation of accrued salaries and wages
A) is to calculate the exact hours of pay that were earned in the current period and paid in a subsequent period.
B) is to compute an approximate proportion of the wages that were earned in the current period and use that amount as the accrual.
C) allows the client to choose between A and B (above) each year.
D) depends on company policy and whether it is consistently followed.D57) Once the auditor has determined the company's policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to
A) recalculate the client's accruals.
B) compare the ledger balance with the journal and the T4 form.
C) confirm the amount with employees.
D) compare the recorded accrued wages with the amount approved in the minutes of the Board.A58) When the employees are paid automatically by bank deposits to the employees' accounts, in an effort to identify potential fraud, the auditor can look for
A) duplicated bank account numbers.
B) duplicated names in the master payroll files.
C) unusual employee names.
D) cancelled cheques.A59) Because of the lack of available evidence, it is usually difficult for an auditor to discover if an employee records more time on his or her time card than they actually worked. One procedure is to reconcile the total hours
A) paid this period with a previous period.
B) paid according to the payroll records with an independent record of the total hours worked, such as those maintained by production control.
C) worked this period with a previous period.
D) worked according to the summary payroll report with the total hours worked as recorded on the time card for the period.B60) Which of the following procedures carried out by the personnel department best reduces the risk of payroll fraud and represents an appropriate responsibility for the department?
A) authorizing overtime hours
B) authorizing the addition or removal of employees from the payroll
C) distributing paycheques
D) collecting and retaining unpaid paychequesBA CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
Hiring subordinate employees.
Initiating requests for salary adjustments for subordinate employees.
Distributing payroll checks to employees.
Reviewing and approving time reports for subordinate employees.Distributing payroll checks to employees.A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, the decrease in this year's income due to these understatements is:
$60,000.
$140,000.
$0.
$110,000.$140,000
60 < 140
60+30+50 = 140A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:
Only bonafide employees worked and their pay was properly computed.
Internal control relating to payroll disbursements are operating effectively.
Employees worked the number of hours for which their pay was computed.
Jobs on which employees worked were charged with the appropriate labor cost.Employees worked the number of hours for which their pay was computed.A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:
An adverse opinion on the required supplementary information.
A separate report should be issued on the required supplementary information.
The required supplementary information should not be referred to.
other-matter paragraph should be added to the audit report.other-matter paragraph should be added to the audit report.A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
Confirmation of related lawsuits with the claimants.
An assessment that loss of the litigation is probable.
An adverse opinion.
Qualification of the audit report.Qualification of the audit report.An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year including those that occurred in prior years is referred to as:
Rollover approach.
Evaluation materiality approach.
Iron curtain approach.
Projected misstatement approach.Iron curtain approach.An approach that quantifies the total of uncorrected misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:
Projected misstatement approach.
Rollover approach.
Iron curtain approach.
Evaluation materiality approach.Rollover approach.An attorney responding to an auditor as a result of the client's letter of audit inquiry may appropriately limit the response to:
Legal matters subject to unsettled points of law, uncorroborated information, or other complex judgments.
Asserted claims and pending or threatened litigation.
Matters to which the attorney has given substantive attention in the form of legal consultation or representation.
Items which have high probability of being resolved to the client's detriment.Matters to which the attorney has given substantive attention in the form of legal consultation or representation.An auditor believes that a client's warranty liability is between $100,000 and $130,000, with each amount in that interval equally likely. The financial statements show a liability of $90,000.
$20,000 judgmental misstatement.
$20,000 projected misstatement.
$10,000 projected misstatement.
$10,000 judgmental misstatement.$10,000 judgmental misstatement.
100-90 = 10An auditor should obtain written representations from the company's attorney concerning litigation claims and assessments, which may be limited to matters that are considered either individually or collectively material. An understanding on the limits of materiality for this purpose has been reached by:
The auditor and the client's lawyer.
Management, the client's lawyer, and the auditor.
Management and the auditor.
The auditor independently of management.Management and the auditor.An auditor will ordinarily examine invoices from lawyers primarily in order to:
Estimate the dollar amount of contingent liabilities.
Substantiate accruals.
Identify possible unasserted litigation, claims, and assessments.
Assess the legal ramifications of litigation in progress.Identify possible unasserted litigation, claims, and assessments.An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to:
Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.
Accept responsibility for year-end adjusting entries.
Extend auditing procedures.
Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report.Extend auditing procedures.An example of an internal control weakness is to assign the human resource department responsibility for:
Maintaining time cards.
Interviewing employees for jobs.
Hiring personnel.
Authorizing deductions from pay.Maintaining time cards.An example of an internal control weakness is to assign the payroll department the responsibility for:
Authorizing increases in pay.
Preparing the payroll checks.
Preparing the payroll expense distribution.
Preparing journal entries for payroll expense.Authorizing increases in pay.Analytical procedures are required as a part of the:
Internal control assessment.
Substantive testing.
Procedures performed near the end of the audit.
Detailed tests of balances.Procedures performed near the end of the audit.Which of the following is least likely to be considered a substantive procedure relating to payroll?
Multiple Choice
Investigate fluctuations in salaries, wages, and commissions.
Test computations of compensation under profit sharing for bonus plans.
Test commission earnings.
Test whether employee time reports are approved by supervisors.Test whether employee time reports are approved by supervisors.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
Multiple Choice
Examine human resources records for accuracy and completeness.
Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.
Make a surprise observation of the company's regular distribution of paychecks on a test basis.
Visit the working areas and verify that employees exist by examining their badge or identification numbers.Make a surprise observation of the company's regular distribution of paychecks on a test basis.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
Multiple Choice
Express an opinion that is qualified due to the inability of the client company to continue as a going concern.
Evaluate management's performance in causing this decline.
Require note disclosure.
Consider the possibility of a misstatement in the financial statements.Consider the possibility of a misstatement in the financial statements.When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
Multiple Choice
Capitalization.
Financing.
Investing.
Operations.Capitalization.The search for unrecorded liabilities for a public company includes procedures usually performed through the:
Multiple Choice
Day the audit report is issued.
End of the client's year.
Date of the auditors' report.
Date the report is filed with the SEC.Date of the auditors' report.The aggregated misstatement in the financial statements is made up of:
Factual Misstatements Projected Misstatements Judgmental Misstatements
(1) Yes Yes Yes
(2) Yes Yes No
(3) No Yes No
(4) No Yes Yes
Multiple Choice
Option (1)
Option (2)
Option (3)
Option (4)Option (1)A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
Multiple Choice
Analytical process.
Loss contingency.
Probable loss.
Unasserted claim.Loss contingency.Which of the following is most likely to be considered a Type 1 subsequent event?
Multiple Choice
A business combination completed after year-end, but for which negotiations began prior to year-end.
A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago.
Customer checks deposited prior to year-end but determined to be uncollectible after year-end.
Introduction of a new line of products after year-end for which major research had been completed prior to year-end.Customer checks deposited prior to year-end but determined to be uncollectible after year-end.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
Multiple Choice
December 31, 20X8.
January 17, 20X9.
February 10, 20X9.
February 16, 20X9.February 10, 20X9.Which of the following procedures is most likely to be included near completion of an audit?
Multiple Choice
Obtaining an understanding of internal control.
Confirmation of receivables.
Observation of inventory.
Performing analytical procedures.Performing analytical procedures.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
Multiple Choice
Notify the board of directors that the auditor's report must no longer be associated with the financial statements.
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements.
Issue revised pro forma financial statements taking into consideration the newly discovered information.Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
Multiple Choice
A business combination.
Early retirement of bonds payable.
Settlement of litigation.
Plant closure due to a strike.Settlement of litigation.The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
Multiple Choice
Separate the custody of assets from the accounting for those assets.
Establish clear lines of authority and responsibility.
Separate duties within the accounting function.
Separate the authorization of transactions from the custody of related assets.Separate the authorization of transactions from the custody of related assets.A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
Multiple Choice
Reviewing and approving time reports for subordinate employees.
Distributing payroll checks to employees.
Hiring subordinate employees.
Initiating requests for salary adjustments for subordinate employees.Distributing payroll checks to employees.Analytical procedures are required as a part of the:
Multiple Choice
Detailed tests of balances.
Internal control assessment.
Procedures performed near the end of the audit.
Substantive testing.Procedures performed near the end of the audit.The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that:
Multiple Choice
The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.
The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work.
The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.Shortly after year-end, Allen Corporation was informed of the bankruptcy of Quest. Allen Corporation showed a receivable of $20,000 (a material amount) due from Quest as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Quest had been experiencing financial difficulties for the past several years. Yet, Quest's bankruptcy did not occur until after Allen Corporation's year-end. Under these circumstances:
The financial statements should be adjusted
The event requires financial statement disclosure, but no adjustment
The auditor's report should be modified for a lack of consistency
A. Yes No No
B. Yes No Yes
C. No Yes Yes
D. No Yes No
Multiple Choice
Option A
Option B
Option C
Option DOption AIn auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
Multiple Choice
Sales and Cost of Goods Sold.
Interest and Bad Debt Expense.
Sales and Bad Debt Expense.
Interest and Cost of Goods Sold.Sales and Bad Debt Expense.Auditors should perform audit procedures relating to subsequent events?
Multiple Choice
Through year-end.
Through issuance of the audit report.
Through the date of the audit report.
For a reasonable period after year-end.Through the date of the audit report.Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
Multiple Choice
Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.
Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
Determine whether reportable conditions have been corrected.
Calculate an estimate the total of uncorrected misstatements in the financial statements.Calculate an estimate the total of uncorrected misstatements in the financial statements.Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
Multiple Choice
Miscellaneous revenue.
Professional fees.
Supplies expense.
Repairs and maintenance.Supplies expense.When auditing the statement of cash flows of a profitable, growing company which combination is most likely?
Cash flows from operations Cash flows from investing
A. Positive Positive
B. Positive Negative
C. Negative Positive
D. Negative Negative
Multiple Choice
Option A
Option B
Option C
Option DOption BThe audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
Multiple Choice
Cash.
Accounts receivable.
Property, plant, and equipment.
Intangible assets.Cash.An example of an internal control weakness is to assign the payroll department the responsibility for:
Multiple Choice
Preparing the payroll expense distribution.
Preparing the payroll checks.
Authorizing increases in pay.
Preparing journal entries for payroll expense.Authorizing increases in pay.An example of an internal control weakness is to assign the human resource department responsibility for:
Multiple Choice
Maintaining time cards.
Hiring personnel.
Authorizing deductions from pay.
Interviewing employees for jobs.Maintaining time cards.For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job?
Multiple Choice
A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.
A test of payroll extensions.
Analytical comparisons of budgeted to actual payroll expense.
Comparison of payee names on canceled payroll checks with the payroll register.A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
Multiple Choice
Obtaining a lawyers' letter.
Confirming accounts payable.
Reviewing the minutes of board of directors' meetings.
Review correspondence with banks.Confirming accounts payable.Which of the following types of matters do not generally require disclosure in the financial statements?
Multiple Choice
General risk contingencies.
Commitments.
Loss contingencies.
Liabilities to related parties.General risk contingencies.Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows:
Multiple Choice
If a loss meets these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
Multiple Choice
Confirmation of related lawsuits with the claimants.
Qualification of the audit report.
An assessment that loss of the litigation is probable.
An adverse opinion.Qualification of the audit report.If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
Multiple Choice
Attempt to determine whether their report is still being relied upon by third parties.
Notify regulatory agencies.
Notify legal counsel.
Wait until the beginning of the next year's audit to determine whether misstatements have occurred.Attempt to determine whether their report is still being relied upon by third parties.Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?
Multiple Choice
Review minutes of board of directors' meeting.
Review the latest available interim financial statements.
Inquire about any unusual adjustments made subsequent to the balance sheet date.
Perform analytical procedures in the period subsequent to the balance sheet date.Perform analytical procedures in the period subsequent to the balance sheet date.Which of the following subsequent events might require an adjustment to the client's financial statements?
Multiple Choice
A business combination with another company.
A major customer declares bankruptcy causing a material receivable to be uncollectible.
Loss of plant and equipment due to a fire. The loss in insured.
Plant employees could possibly go on strike.A major customer declares bankruptcy causing a material receivable to be uncollectible.Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
Multiple Choice
Dividends.
New debt issuance.
New bank accounts.
Write-off of trade accounts receivable.Write-off of trade accounts receivable.Which of the following is not a procedure normally performed while completing the audit of a public company?
Multiple Choice
Obtain a lawyer's letter.
Obtain a representations letter.
Perform an overall review using analytical procedures.
Update internal control questionnaire.Update internal control questionnaire.Auditors must communicate internal control "significant deficiencies" to:
Multiple Choice
The audit committee.
The shareholders.
The SEC.
The Federal Trade Commission.The audit committee.Which of the following procedures is not a procedure that is completed near the end of the engagement?
Multiple Choice
Review cash transactions.
Review to identify subsequent events.
Obtain the lawyer's letter.
Obtain the letter of representations.Review cash transactions.Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is considered to be properly stated after performing appropriate procedures?
Multiple Choice
FASB-required supplementary information.
Other information in documents containing audited financial statements.
Supplementary information in relation to the financial statements as a whole.
GASB-required supplementary information.Other information in documents containing audited financial statements.In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:
Multiple Choice
Factual misstatements in the financial statements.
Judgmental misstatements in the financial statements.
Factual and judgmental misstatements in the financial statements.
Factual, judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements.Factual, judgmental and projected misstatements and an allowance for undetected misstatements in the financial statements.Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
Multiple Choice
Extrapolation difference.
Factual misstatement.
Redundancy effect misstatement.
Projected misstatement.Factual misstatement.The review of audit working papers by the audit partner is normally completed:
Multiple Choice
Prior to year-end.
Immediately as each working paper is completed.
Near the completion of the audit.
After issuance of the audit report, but prior to required subsequent event review procedures.Near the completion of the audit.Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The factual misstatement in this situation is:
Multiple Choice
$0.
$30,000.
$40,000.
$50,000.$0.Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000, with all points in that interval equally likely. The judgmental misstatement in this situation is:
Multiple Choice
$0.
$30,000.
$40,000.
$50,000.$30,000.An approach that quantifies the total of uncorrected misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:
Multiple Choice
Evaluation materiality approach.
Iron curtain approach.
Projected misstatement approach.
Rollover approach.Rollover approach.An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year including those that occurred in prior years is referred to as:
Multiple Choice
Evaluation materiality approach.
Iron curtain approach.
Projected misstatement approach.
Rollover approach.Iron curtain approach.A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, the decrease in this year's income due to these understatements is:
Multiple Choice
$0.
$60,000.
$110,000.
$140,000.$140,000.Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Multiple Choice
Determine whether inventory ordered before the year-end was included in the physical count.
Inquire about payroll checks that were recorded before year-end but cashed after year-end.
Investigate changes in capital stock recorded after year-end.
Review tax returns prepared by management after year-end.Investigate changes in capital stock recorded after year-end.One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
Multiple Choice
Weaknesses of a material nature in internal control.
Noncompliance with prescribed control procedures.
Improper separation of accounting and other financial duties.
Unusual transactions.Unusual transactions.Which of the following is an analytical procedure that should be applied to the income statement?
Multiple Choice
Select sales and expense items and trace amounts to related supporting documents.
Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.
Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.It would be appropriate for the payroll accounting department to be responsible for which of the following functions?
Multiple Choice
Approval of employee time records.
Maintenance of records of employment, discharges, and pay increases.
Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
Distribution of paychecks to employees.Preparation of periodic governmental reports as to employees' earnings and withholding taxes.Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?
Multiple Choice
Separation of payroll duties is less than adequate for effective internal control.
Total payroll costs are a significant part of total operating costs.
The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year.
Employee turnover is excessive.Separation of payroll duties is less than adequate for effective internal control.To minimize the opportunities for fraud, unclaimed cash payroll should be:
Multiple Choice
Deposited in a safe deposit box.
Held by the payroll custodian.
Deposited in a special bank account.
Held by the controller.Deposited in a special bank account.A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:
Multiple Choice
Only bonafide employees worked and their pay was properly computed.
Jobs on which employees worked were charged with the appropriate labor cost.
Internal control relating to payroll disbursements are operating effectively.
Employees worked the number of hours for which their pay was computed.Employees worked the number of hours for which their pay was computed.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?
Multiple Choice
Sale of long-term debt or capital stock.
Loss of a plant as a result of a flood.
Major purchase of a business which is expected to double the sales volume.
Settlement of litigation in excess of the recorded liability.Settlement of litigation in excess of the recorded liability.With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is:
Multiple Choice
Extended to include all events occurring until the date of the last subsequent event referred to.
Limited to the specific event referred to.
Limited to all events occurring through the date of issuance of the report.
Extended to include all events occurring through the date of submission of the report to the client.Limited to the specific event referred to.An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to:
Multiple Choice
Extend auditing procedures.
Accept responsibility for year-end adjusting entries.
Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report.
Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.Extend auditing procedures.Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
Multiple Choice
An estimate of the dollar amount of the probable loss.
An expert opinion as to whether a loss is possible, probable, or remote.
Information concerning the progress of cases to date.
Corroborative audit evidence.Corroborative audit evidence.The auditors' primary means of obtaining corroboration of management's information concerning litigation is a:
Multiple Choice
Letter of audit inquiry to the client's lawyer.
Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
Confirmation of claims and assessments from the other parties to the litigation.
Confirmation of claims and assessments from an officer of the court presiding over the litigation.Letter of audit inquiry to the client's lawyer.Which of the following auditing procedures is ordinarily performed last?
Multiple Choice
Reading of the minutes of the directors' meetings.
Confirming accounts payable.
Obtaining a management representation letter.
Testing of the purchasing function.Obtaining a management representation letter.Which of the following is not correct relating to representation letters?
Multiple Choice
They are ordinarily dated as of the date of the audit report.
They are signed by members of top management.
They must be obtained for audits.
They often serve as a substitute for the application of other procedures.They often serve as a substitute for the application of other procedures.The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:
Multiple Choice
Last day of significant field work.
Report cutoff date.
Report release date.
Representation date.Report release date.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?
Multiple Choice
"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
"There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."
"We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities."
"No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.""Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."To which of the following matters would materiality limits not apply when obtaining written client representations?
Multiple Choice
Violations of state labor regulations.
Disclosure of line-of-credit arrangements.
Information about related party transactions.
Instances of fraud involving management.Instances of fraud involving management.The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to:
Multiple Choice
Indicate in the auditors' report, that the "other financial information" is only compiled.
Consider whether the "other financial information" is accurate by performing a limited review.
Obtain written representations from managements as to the material accuracy of the "other financial information."
Read and consider the manner of presentation of the "other financial information."Read and consider the manner of presentation of the "other financial information."In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustments when they were identified. What is the primary purpose served by this schedule?
Multiple Choice
To point out to the responsible client officials the errors made by various company personnel.
To summarize the adjustments that must be made before the company can prepare and submit its federal tax return.
To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.
To summarize the misstatements made by the company so that corrections can be made after the audited financial statements are released.To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.An auditor will ordinarily examine invoices from lawyers primarily in order to:
Multiple Choice
Substantiate accruals.
Assess the legal ramifications of litigation in progress.
Estimate the dollar amount of contingent liabilities.
Identify possible unasserted litigation, claims, and assessments.Identify possible unasserted litigation, claims, and assessments.The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:
Multiple Choice
Letter of audit inquiry to the client's lawyer.
Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
Confirmation of claims and assessments from the other parties to the litigation.
Confirmation of claims and assessments from an officer of the court presiding over the litigation.Letter of audit inquiry to the client's lawyer.A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:
Multiple Choice
other-matter paragraph should be added to the audit report.
A separate report should be issued on the required supplementary information.
An adverse opinion on the required supplementary information.
The required supplementary information should not be referred to.other-matter paragraph should be added to the audit report.Which of the following summarizes the threshold at which auditors are required to request management to record any identified factual misstatements that are:
Multiple Choice
Material.
Material or immaterial.
Significant deficiencies.
Other than trivial.Other than trivial.The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a:
Multiple Choice
Factual misstatement.
Judgmental misstatement.
Projected misstatement.
Relevance misstatement.Projected misstatement.The auditors have calculated the total uncorrected identified misstatements as $445,000; materiality for the audit is $450,000. The client has declined to record the related journal entries. In this situation it is most likely that the auditors will:
Multiple Choice
Conclude that the financial statements are not materially misstated.
Issue a disclaimer of opinion.
Perform additional audit procedures to reduce audit risk to an appropriately low level.
Resign from the audit.Perform additional audit procedures to reduce audit risk to an appropriately low level.When a nonpublic audit client has omitted required supplementary information, the audit report should include a(n)?
Multiple Choice
Disclaimer of opinion.
Other-matter paragraph.
Qualified opinion.
Statement indicating that the financial statements should not be relied upon.Other-matter paragraph.An auditor believes that a client's warranty liability is between $100,000 and $130,000, with each amount in that interval equally likely. The financial statements show a liability of $90,000.
Multiple Choice
$10,000 judgmental misstatement.
$10,000 projected misstatement.
$20,000 judgmental misstatement.
$20,000 projected misstatement.$10,000 judgmental misstatement.The proper use of prenumbered termination forms by the payroll department should provide assurance that all:
Multiple Choice
Uncashed payroll checks were issued to employees who have not been terminated.
Personnel files are kept up to date.
Employees who have not been terminated receive their payroll checks.
Terminated employees are removed from payroll.Terminated employees are removed from payroll.Effective internal control over the payroll function would include which of the following?
Multiple Choice
Total time recorded on time clock cards should be reconciled to job reports by employees responsible for those specific jobs.
Payroll department employees should be supervised by the management of the personnel department.
Payroll department employees should be responsible for maintaining employee personnel records.
Total time spent on jobs should be compared with total time indicated on time clock punch cards.Total time spent on jobs should be compared with total time indicated on time clock punch cards.if management refuses to furnish certain written representations that the auditor believes are essential, which of the following is appropriate?
Multiple Choice
The auditor can rely on oral evidence relating to the matter as a basis for an unmodified (unqualified) opinion.
The client's refusal does not constitute a scope limitation that may lead to a modification of the opinion.
This may have an effect on the auditor's ability to rely on other representations of management.
The auditor should issue an adverse opinion because of management's refusal.This may have an effect on the auditor's ability to rely on other representations of management.An auditor should obtain written representations from the company's attorney concerning litigation claims and assessments, which may be limited to matters that are considered either individually or collectively material. An understanding on the limits of materiality for this purpose has been reached by:
Multiple Choice
The auditor and the client's lawyer.
Management and the auditor.
Management, the client's lawyer, and the auditor.
The auditor independently of management.Management and the auditor.Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and Hall began the audit work on February 17, year 2. Hall completed the audit work on March 24, year 2, and completed the report on March 28, year 2. The client's representation letter normally would be dated:
Multiple Choice
February 13, year 2.
February 17, year 2.
March 24, year 2.
March 28, year 2.March 24, year 2.An attorney responding to an auditor as a result of the client's letter of audit inquiry may appropriately limit the response to:
Multiple Choice
Items which have high probability of being resolved to the client's detriment.
Asserted claims and pending or threatened litigation.
Legal matters subject to unsettled points of law, uncorroborated information, or other complex judgments.
Matters to which the attorney has given substantive attention in the form of legal consultation or representation.Matters to which the attorney has given substantive attention in the form of legal consultation or representation.The primary objective of analytical procedures used near the end of an audit is to:
Multiple Choice
Obtain evidence from details tested to corroborate particular assertions.
Identify areas that represent specific risks relevant to the audit.
Assist the auditor when forming overall conclusions about the financial statements.
Satisfy doubts when questions arise about a client's ability to continue in existence.Assist the auditor when forming overall conclusions about the financial statements.On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first:
Multiple Choice
Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion.
Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.
Take no additional action because subsequent events have no effect on the financial statements that were reported on.
Assess the importance of the omitted procedures to Brown's present ability to support the opinion.Assess the importance of the omitted procedures to Brown's present ability to support the opinion.Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
Multiple Choice
Review subsequent events.
Perform search for unrecorded liabilities.
Send inquiry letter to client's legal counsel.
Review detail and test significant travel and entertainment expenses.Review detail and test significant travel and entertainment expenses.11. Analytical procedures are required as a part of the
A. Detailed tests of balances.
B. Internal control assessment.
C. Overall review at the conclusion of the audit.
D. Substantive testing.C12. The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit is that:
A. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.
B. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work.
D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.D14. In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
A. Sales and Cost of Goods Sold.
B. Interest and Bad Debt Expense.
C. Sales and Bad Debt Expense.
D. Interest and Cost of Goods Sold.C15. Auditors should perform audit procedures relating to subsequent events?
A. Through year end.
B. Through issuance of the audit report.
C. Through the last day of field work.
D. For a reasonable period after year end.C16. Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.
B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
C. Determine whether reportable conditions have corrected.
D. Develop an estimate of the total likely misstatement in the financial statements.D17. Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
A. Miscellaneous revenue.
B. Professional fees.
C. Travel expense.
D. Repairs and maintenance.C19. The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
A. Cash.
B. Accounts receivable.
C. Property, plant and equipment.
D. Intangible assets.A20. An example of an internal control weakness is to assign the payroll department the responsibility for:
A. Preparing the payroll expense distribution.
B. Preparing the payroll checks.
C. Authorizing increases in pay.
D. Preparing journal entries for payroll expense.C21. An example of an internal control weakness is to assign the personnel department responsibility for:
A. Distribution of paychecks.
B. Hiring personnel.
C. Authorizing deductions from pay.
D. Interviewing employees for jobs.A22. Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job?
A. A surprise observation of a paycheck distribution.
B. A test of payroll extensions.
C. Analytical comparisons of budgeted to actual payroll expense.
D. Comparison of payee names on canceled payroll checks with the payroll register.A23. Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
A. Obtaining a lawyers' letter.
B. Confirming accounts payable.
C. Reviewing the minutes of board of directors' meetings.
D. Review correspondence with banks.B24. Which of the following types of matters do not generally require disclosure in the financial statements?
A. General risk contingencies.
B. Commitments.
C. Loss contingencies.
D. Liabilities to related parties.A25. Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows:
A. If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
B. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
C. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.D26. A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report.
C. An assessment that loss of the litigation is probable.
D. An adverse opinion.B27. If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
A. Attempt to determine whether their report is still being relied upon by third parties.
B. Notify regulatory agencies.
C. Notify legal counsel.
D. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.A28. Which of the following is not a procedure that auditors typically perform to search for significant events during the subsequent period?
A. Review minutes of board of directors' meeting.
B. Review the latest available interim financial statements.
C. Inquire about any unusual adjustments made subsequent to the balance sheet date.
D. Review changes in internal control during the period subsequent to the balance sheet date.D29. Which of the following subsequent events might require an adjustment to the client's financial statements?
A. A business combination with another company.
B. Loss on the sale of a closely-held investment.
C. Loss of plant and equipment due to a fire.
D. Retirement of bonds payable at a loss.B30. Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
A. Dividends.
B. New debt issuance.
C. New bank accounts.
D. Writeoff of trade accounts receivable.D31. Which of the following is not a procedure normally performed while completing the audit?
A. Obtain a lawyer's letter.
B. Obtain a representations letter.
C. Perform an overall review using analytical procedures.
D. Obtain confirmation of capital stockholdings from shareholders.D32. Auditors must communicate internal control "significant deficiencies" to:
A. The audit committee.
B. The shareholders.
C. The SEC.
D. The Federal Trade Commission.A33. Which of the following procedures is not a procedure that is completed near the end of the engagement?
A. Review cash transactions.
B. Review to identify subsequent events.
C. Obtain the lawyer's letter.
D. Obtain the letter of representations.A34. Which of the following information must be reported on in the auditors' report?
A. FASB-required supplementary information.
B. Other information in client-prepared documents.
C. Information accompanying financial statements in auditor-submitted documents.
D. GASB-required supplementary information.C35. In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:
A. Likely misstatements in the financial statements.
B. Known misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the financial statements.
D. Known, projected and potential misstatements in the financial statements.C36. Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
A. Extrapolation difference.
B. Known misstatement.
C. Likely misstatement.
D. Projected misstatement.B37. The review of audit working papers by the audit partner is normally completed:
A. Prior to year-end.
B. Immediately as each working paper is completed.
C. Near the completion of field work.
D. After issuance of the audit report, but prior to required subsequent event review procedures.C38. Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000A39. Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000B40. An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.D41. An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.B42. A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000D43. A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000B44. One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
A. Weaknesses of a material nature in internal control.
B. Non-compliance with prescribed control procedures.
C. Improper separation of accounting and other financial duties.
D. Unusual transactions.D45. Which of the following is an analytical procedure that should be applied to the income statement?
A. Select sales and expense items and trace amounts to related supporting documents.
B. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
C. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.
D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.D46. It would be appropriate for the payroll accounting department to be responsible for which of the following functions?
A. Approval of employee time records.
B. Maintenance of records of employment, discharges, and pay increases.
C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
D. Distribution of paychecks to employees.C47. Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?
A. Separation of payroll duties is less than adequate for effective internal control.
B. Total payroll costs are a significant part of total operating costs.
C. The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year.
D. Employee turnover is excessive.A48. To minimize the opportunities for fraud, unclaimed cash payroll should be:
A. Deposited in a safe deposit box.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.C49. The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
A. Separate the custody of assets from the accounting for those assets.
B. Establish clear lines of authority and responsibility.
C. Separate duties within the accounting function.
D. Separate the authorization of transactions from the custody of related assets.D50. A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
A. Reviewing and approving time reports for subordinate employees.
B. Distributing payroll checks to employees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate employees.B51. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:
A. Only bona fide employees worked and their pay was properly computed.
B. Jobs on which employees worked were charged with the appropriate labor cost.
C. Internal control relating to payroll disbursements are operating effectively.
D. Employees worked the number of hours for which their pay was computed.D52. 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 which is expected to double the sales volume.
D. Settlement of litigation in excess of the recorded liability.D53. With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion of field work is:
A. Extended to include all events occurring until the date of the last subsequent event referred to.
B. Limited to the specific event referred to.
C. Limited to all events occurring through the date of issuance of the report.
D. Extended to include all events occurring through the date of submission of the report to the client.B54. 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 year-end adjusting entries.
C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report.
D. Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.A55. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
A. An estimate of the dollar amount of the probable loss.
B. An expert opinion as to whether a loss is possible, probable or remote.
C. Information concerning the progress of cases to date.
D. Corroborative audit evidence.D56. The auditors' primary means of obtaining corroboration of management's information concerning litigation is a:
A. Letter of audit inquiry to the client'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.A57. Which of the following auditing procedures is ordinarily performed last?
A. Reading of the minutes of the directors' meetings.
B. Confirming accounts payable.
C. Obtaining a management representation letter.
D. Testing of the purchasing function.C58. Which of the following is not correct relating to representation letters?
A. They are ordinarily dated as of the date of the audit report.
B. They are signed by members of top management.
C. They must be obtained for audits.
D. They often serve as a substitute for the application of other procedures.D59. The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:
A. Last day of significant field work.
B. Report cutoff date.
C. Report release date.
D. Representation date.C60. 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?
A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
B. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."
C. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."A61. To which of the following matters would materiality limits not apply when obtaining written client representations?
A. Violations of state labor regulations.
B. Disclosure of line-of-credit arrangements.
C. Information about related party transactions.
D. Instances of fraud involving management.D62. The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to:
A. Indicate in the auditors' report, that the "other financial information" is unaudited.
B. Consider whether the "other financial information" is accurate by performing a limited review.
C. Obtain written representations from managements as to the material accuracy of the "other financial information."
D. Read and consider the manner of presentation of the "other financial information."D63. In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule?
A. To point out to the responsible client officials the errors made by various company personnel.
B. To summarize the adjustments that must be made before the company can prepare and submit its federal tax return.
C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.
D. To summarize the misstatements made by the company so that corrections can be made after the audited financial statements are released.C64. 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 possible unasserted litigation, claims and assessments.D65. The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:
A. Letter of audit inquiry to the client'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.AOverall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
income statement ratios to balance sheet ratios.
revenue and expense account balances to the monthly reported net income.
income statement ratios to published industry averages.
revenue and expense account totals to the corresponding figures of the preceding years.revenue and expense account totals to the corresponding figures of the preceding years.For which of the following ledger accounts would the auditor be most likely to analyze the details?
Postage expense.
Supplies expense.
Miscellaneous expense.
Sales salaries expense.Miscellaneous expense.An example of an internal control weakness is to assign to a supervisor the responsibility for:
reviewing and approving time reports for subordinate employees.
initiating requests for salary adjustments for subordinate employees.
authorizing payroll checks for terminated employees.
distributing payroll checks to subordinate employees.distributing payroll checks to subordinate employees.The date of the management representation letter should coincide with the:
date of the auditor's report.
balance sheet date.
date of the latest subsequent event referred to in the notes to the financial statements.
date of the engagement agreement.date of the auditor's report.A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
The client decided to change depreciation methods in the coming year.
A substantial portion of the company's inventory was written off as obsolete on January 31.
The factory building was damaged by a fire on January 19.
A major subsidiary was sold on February 7.A substantial portion of the company's inventory was written off as obsolete on January 31.In connection with the annual audit, which of the following is not a "subsequent events" procedure?
Review available interim financial statements.
Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings.
Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.
Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.Analytical procedures are required as a part of the:
Detailed tests of balances.
Internal control assessment.
Procedures performed near the end of the audit.
Substantive testing.Procedures performed near the end of the audit.Auditors should perform audit procedures relating to subsequent events?
Through year-end.
Through issuance of the audit report.
Through the date of the audit report.
For a reasonable period after year-end.Through the date of the audit report.Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.
Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
Determine whether reportable conditions have been corrected.
Calculate an estimate the total of uncorrected misstatements in the financial statements.Calculate an estimate the total of uncorrected misstatements in the financial statements.For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job?
A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.
A test of payroll extensions.
Analytical comparisons of budgeted to actual payroll expense.
Comparison of payee names on canceled payroll checks with the payroll register.A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment.
Visit the working areas and confirm with employees their badge or identification numbers.Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
Obtaining a lawyers' letter.
Confirming accounts payable.
Reviewing the minutes of board of directors' meetings.
Review correspondence with banks.Confirming accounts payable.Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows:
If a loss meets these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements, the auditor may issue an unqualified opinion.Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?
Review minutes of board of directors' meeting.
Review the latest available interim financial statements.
Inquire about any unusual adjustments made subsequent to the balance sheet date.
Perform analytical procedures in the period subsequent to the balance sheet date.Perform analytical procedures in the period subsequent to the balance sheet date.Which of the following subsequent events might require an adjustment to the client's financial statements?
A business combination with another company.
A major customer declares bankruptcy causing a material receivable to be uncollectible.
Loss of plant and equipment due to a fire. The loss in insured.
Plant employees could possibly go on strike.A major customer declares bankruptcy causing a material receivable to be uncollectible.
Loss on the sale of a closely-held investmentWhich of the following is not a procedure normally performed while completing the audit of a public company?
Obtain a lawyer's letter.
Obtain a representations letter.
Perform an overall review using analytical procedures.
Update internal control questionnaire.Update internal control questionnaire.Which of the following procedures is not a procedure that is completed near the end of the engagement?
Review cash transactions.
Review to identify subsequent events.
Obtain the lawyer's letter.
Obtain the letter of representations.Review cash transactions.Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?Develop an estimate of the total likely misstatement in the financial statementsManagement estimates the company's allowance for doubtful accounts as $200,000 and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is:$30,000With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion of field work is:
A. Extended to include all events occurring until the date of the last subsequent event referred to.
B. Limited to the specific event referred to.
C. Limited to all events occurring through the date of issuance of the report.
D. Extended to include all events occurring through the date of submission of the report to the client.B. Limited to the specific event referred to.Which of the following internal control objectives is likely to be the auditors/ major concern in the audit of the payroll cycleRecorded payroll transactions are valid.Key segregations of duties in the human resource management process include all of the following except:
The supervision function should be separated from the payroll-processing function.
The disbursements function should be separate from the supervision function.
The human resources function should be separate from setting salaries.
The payroll-processing function should be separate from the general ledger function.The human resources function should be separate from setting salaries.An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible forAuthorizing payroll rate changes for all employeesWhich of the following is a control activity that most likely could help prevent employee payroll fraud?the human resources department promptly sends employee termination notices to the payroll rupervisorWhich of the following could test the occurrence assertion for payroll-related liabilities?Compare items in accrued payroll taxes to the supporting payroll tax returnA substantive test of transactions to test the completeness assertion includesTracing sample of time cards to the payroll registerWhich of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
a. Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.
b. The cashier began lapping accounts receivable in 200X.
c. An increase in property tax rates has not been recognized in the company's 200X accrual.
d. The company changed its capitalization policy for small tools in 200X.d. The company changed its capitalization policy for small tools in 200X.Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
a. income statement ratios to published industry averages.
b. income statement ratios to balance sheet ratios.
c. revenue and expense account totals to the corresponding figures of the preceding years.
d. revenue and expense account balances to the monthly reported net income.c. revenue and expense account totals to the corresponding figures of the preceding years.The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
a. costs.
b. transactions.
c. cutoffs.
d. authorizations.b. transactions.For which of the following ledger accounts would the auditor be most likely to analyze the details?
a. Sales salaries expense.
b. Miscellaneous expense.
c. Postage expense.
d. Supplies expenseb. Miscellaneous expense.An example of an internal control weakness is to assign to a supervisor the responsibility for:
a. reviewing and approving time reports for subordinate employees.
b. authorizing payroll checks for terminated employees.
c. initiating requests for salary adjustments for subordinate employees.
d. distributing payroll checks to subordinate employees.d. distributing payroll checks to subordinate employees.Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The duties of hiring, payroll computation, and payment to employees should be segregated.
c. The payment of cash to employees should be replaced with payment by checks.
d. The confidentiality of employee payroll data should be carefully protected to prevent fraud.b. The duties of hiring, payroll computation, and payment to employees should be segregated.A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
a. all unclaimed payroll checks are properly returned to the cashier.
b. all employees have in their possession proper employee identification.
c. the paymaster is not involved in the distribution of payroll checks.
d. names on the company payroll are those of bona fide employees presently on the job.d. names on the company payroll are those of bona fide employees presently on the job.The date of the management representation letter should coincide with the:
a. date of the auditor's report.
b. balance sheet date.
c. date of the engagement agreement.
d. date of the latest subsequent event referred to in the notes to the financial statements.a. date of the auditor's report.Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
a. a postdated footnote.
b. the next scheduled interim visit.
c. the final billing for audit services rendered.
d. the auditors' report.d. the auditors' report.A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
a. The factory building was damaged by a fire on January 19.
b. A major subsidiary was sold on February 7.
c. The client decided to change depreciation methods in the coming year.
d. A substantial portion of the company's inventory was written off as obsolete on January 31.d. A substantial portion of the company's inventory was written off as obsolete on January 31.Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
a. Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.
b. The cashier began lapping accounts receivable in 200X.
c. An increase in property tax rates has not been recognized in the company's 200X accrual.
d. The company changed its capitalization policy for small tools in 200X.d. The company changed its capitalization policy for small tools in 200X.Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
a. income statement ratios to published industry averages.
b. income statement ratios to balance sheet ratios.
c. revenue and expense account totals to the corresponding figures of the preceding years.
d. revenue and expense account balances to the monthly reported net income.c. revenue and expense account totals to the corresponding figures of the preceding years.The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
a. costs.
b. transactions.
c. cutoffs.
d. authorizations.b. transactions.For which of the following ledger accounts would the auditor be most likely to analyze the details?
a. Sales salaries expense.
b. Miscellaneous expense.
Postage expense.
Supplies expense.b. Miscellaneous expense.An example of an internal control weakness is to assign to a supervisor the responsibility for:
a. reviewing and approving time reports for subordinate employees.
b. authorizing payroll checks for terminated employees.
c. initiating requests for salary adjustments for subordinate employees.
d. distributing payroll checks to subordinate employees.d. distributing payroll checks to subordinate employees.Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The duties of hiring, payroll computation, and payment to employees should be segregated.
c. The payment of cash to employees should be replaced with payment by checks.
d. The confidentiality of employee payroll data should be carefully protected to prevent fraud.b. The duties of hiring, payroll computation, and payment to employees should be segregated.A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
a. all unclaimed payroll checks are properly returned to the cashier.
b. all employees have in their possession proper employee identification.
c. the paymaster is not involved in the distribution of payroll checks.
d. names on the company payroll are those of bona fide employees presently on the job.d. names on the company payroll are those of bona fide employees presently on the job.The date of the management representation letter should coincide with the:
a. date of the auditor's report.
b. balance sheet date.
c. date of the engagement agreement.
d. date of the latest subsequent event referred to in the notes to the financial statements.a. date of the auditor's report.Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
a. a postdated footnote.
b. the next scheduled interim visit.
c. the final billing for audit services rendered.
d. the auditors' report.d. the auditors' report.A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
a. The factory building was damaged by a fire on January 19.
b. A major subsidiary was sold on February 7.
c. The client decided to change depreciation methods in the coming year.
d. A substantial portion of the company's inventory was written off as obsolete on January 31.d. A substantial portion of the company's inventory was written off as obsolete on January 31.When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon:
(A) cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.
(B) the guidance provided by the FASB Statement on the statement of cash flows.
(C) analysis of significant ratios of prior years as compared to the current year.
(D) determination of the amount of working capital at year-end.(A) cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
(A) The cashier began lapping accounts receivable in 200X.
(B) Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.
(C) An increase in property tax rates has not been recognized in the company's 200X accrual.
(D) The company changed its capitalization policy for small tools in 200X.(D) The company changed its capitalization policy for small tools in 200X.Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
(A) revenue and expense account balances to the monthly reported net income.
(B) income statement ratios to published industry averages.
(C) revenue and expense account totals to the corresponding figures of the preceding years.
(D) income statement ratios to balance sheet ratios.(C) revenue and expense account totals to the corresponding figures of the preceding years.The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
(A) cutoffs.
(B) costs.
(C) transactions.
(D) authorizations.(C) transactions.For which of the following ledger accounts would the auditor be most likely to analyze the details?
(A) Miscellaneous expense.
(B) Supplies expense.
(C) Postage expense.
(D) Sales salaries expense.(A) Miscellaneous expense.An example of an internal control weakness is to assign to a supervisor the responsibility for:
(A) reviewing and approving time reports for subordinate employees.
(B) authorizing payroll checks for terminated employees.
(C) distributing payroll checks to subordinate employees.
(D) initiating requests for salary adjustments for subordinate employees.(C) distributing payroll checks to subordinate employees.Which of the following best describes proper internal control over payroll?
(A) The confidentiality of employee payroll data should be carefully protected to prevent fraud.
(B) The duties of hiring, payroll computation, and payment to employees should be segregated.
(C) The payment of cash to employees should be replaced with payment by checks.
(D) The preparation of the payroll must be under the control of the personnel department.(B) The duties of hiring, payroll computation, and payment to employees should be segregated.A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
(A) all unclaimed payroll checks are properly returned to the cashier.
(B) names on the company payroll are those of bona fide employees presently on the job.
(C) the paymaster is not involved in the distribution of payroll checks.
(D) all employees have in their possession proper employee identification.(B) names on the company payroll are those of bona fide employees presently on the job.The date of the management representation letter should coincide with the:
balance sheet date.
(A) date of the auditor's report.
(B) date of the engagement agreement.
(C) date of the latest subsequent event referred (D) to in the notes to the financial statements.(B) date of the engagement agreement.Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
(A) the final billing for audit services rendered.
(B) the next scheduled interim visit.
(C) the auditors' report.
(D) a postdated footnote.(C) the auditors' report.A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
(A) The factory building was damaged by a fire on January 19.
(B) The client decided to change depreciation methods in the coming year.
(C) A substantial portion of the company's inventory was written off as obsolete on January 31.
(D) A major subsidiary was sold on February 7.(C) A substantial portion of the company's inventory was written off as obsolete on January 31.In connection with the annual audit, which of the following is not a "subsequent events" procedure?
(A) Review available interim financial statements.
(B) Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.
(C) Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.
(D) Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings.(B) Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.T/F: The auditors generally perform an analysis of the miscellaneous revenue account to determine the nature of the items recorded to the account.TrueT/F: For effective internal control over payroll, the personnel department should prepare the payroll records and checks.FalseT/F: Making payroll expenditures from an imprest payroll bank account ordinarily is a strength relating to internal control, rather than a weakness.TrueT/F: When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report.TrueT/F: All information included in a financial report prepared and submitted by the auditors should be audited.FalseT/F: Subsequent events, which provide additional evidence regarding conditions existing at the balance sheet date, may result in adjustment of the financial statements.TrueT/F: The financial statements should not be adjusted for subsequent events that provide important evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date.TrueT/F: Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and should return to complete the audit work on a later date.Falsea. The client's year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Letter dated February 14, year 2:
"I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1." Financial statement effect and audit response?FSE: No impact on financial statement amounts or notes.
Audit response: Legal response is appropriately dated.a. The client's year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Letter dated January 21, year 2:
"I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1." Financial statement effect and audit response?FSE: Verify amount due attorney is recorded in financial statement amounts.
Audit response: Update legal response.a. The client's year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Letter dated February 26, year 2:
K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Financial statement effect and audit response?FSE: Disclosure in notes relating to nature of litigation, but no amount disclosed.
Audit response: Update audit report date.a. The client's year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Letter dated March 16, year 2:
J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000.
Financial statement effect and audit response?FSE: Disclosure in notes relating to nature of litigation, but no amount disclosed.
Audit response: Update audit report date.a. The client's year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Letter dated February 14, year 2:
R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. It is reasonably possible that the case will be settled for approximately $35,000. Financial statement effect and audit response?FSE: Disclosure in notes relating to nature of litigation, including loss amount.
Audit response: Legal response is appropriately dated.a. The client's year end is December 31, year 1.
b. The anticipated audit report date is February 15, year 2.
c. All amounts are material to the financial statements.
Letter dated February 14, year 2:
L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case is tentatively settled for $35,000. Financial statement effect and audit response?FSE: Potential litigation settlement accrued in financial statements.
Audit response: Legal response is appropriately dated.In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements.
On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3. Adjustment or possible disclosure?AdjustmentIn connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements.
On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim. Adjustment or possible disclosure?AdjustmentIn connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements.
On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc. Adjustment or possible disclosure?Consider disclosureIn connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements.
On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory. Adjustment or possible disclosure?Consider disclosureIn connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements.
On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds. Adjustment or possible disclosure?Consider disclosureWhich of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
-Early retirement of bonds payable.
-Plant closure due to a strike.
-Settlement of litigation.
-A business combination.Settlement of litigation.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
-Examine human resources records for accuracy and completeness.
-Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.
-Visit the working areas and verify that employees exist by examining their badge or identification numbers.
-Make a surprise observation of the company's regular distribution of paychecks on a test basis.Make a surprise observation of the company's regular distribution of paychecks on a test basis.When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
-Investing
-Operations
-Financing
-CapitalizationCapitalizationWhich of the following procedures is most likely to be included near completion of an audit?
-Obtaining an understanding of internal control.
-Observation of inventory.
-Performing analytical procedures.
-Confirmation of receivables.Performing analytical procedures.The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1 ("legal response"). For each excerpt, select the most appropriate financial statement effect and audit response. Each excerpt is independent. Responses may be used once, more than once, or not at all from the table below:
a)The client's year-end is December 31, year 1.
b)The anticipated audit report date is February 15, year 2.
c)All amounts are material to the financial statements.
Letter dated February 14, year 2:
"I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1."Financial statement effect: No impact on financial statement amounts or notes.
Audit response: Legal response is appropriately dated.Letter dated January 21, year 2:
"I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1."Financial Statement Effect: Verify amount due attorney is recorded in financial statement amounts.
Audit response: Update legal response.Letter dated February 26, year 2:
K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss.Financial statement effect: Disclosure in notes relating to nature of litigation, but no amount disclosed.
Audit response: Update audit report dateLetter dated March 16, year 2:
J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000.Financial statement effect: Disclosure in notes relating to nature of litigation, but no amount disclosed.
Audit response: Update audit report date.Letter dated February 14, year 2:
R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. It is reasonably possible that the case will be settled for approximately $35,000.Financial statement effect: Disclosure in notes relating to nature of litigation, including loss amount.
Audit response: Legal response is appropriately dated.Letter dated February 14, year 2:
L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case is tentatively settled for $35,000.Financial statement effect: Potential litigation settlement accrued in financial statements.
Audit response: Legal response is appropriately dated.In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28, 20X4, may affect the company's financial statements.
The following material events or transactions have come to her attention:
Required:
For each of the subsequent events, indicate whether they should result in:
Adjustment—an adjusting entry as of 20X3.
Possible Disclosure—Consider note disclosure as of 20X3.
On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.AdjustmentOn January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.AdjustmentOn January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.Consider DisclosureOn February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.Consider DisclosureOn February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.Consider DisclosureWhich of the following is most likely to be considered a Type 1 subsequent event?
-A business combination completed after year-end, but for which negotiations began prior to year-end.
-Introduction of a new line of products after year-end for which major research had been completed prior to year-end.
-Customer checks deposited prior to year-end but determined to be uncollectible after year-end.
-A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago.Customer checks deposited prior to year-end but determined to be uncollectible after year-end.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
-January 17, 20X9.
-February 16, 20X9.
-December 31, 20X8.
-February 10, 20X9.February 10, 20X9.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
-Evaluate management's performance in causing this decline.
-Require note disclosure.
-Express an opinion that is qualified due to the inability of the client company to continue as a going concern.
-Consider the possibility of a misstatement in the financial statements.Consider the possibility of a misstatement in the financial statements.The search for unrecorded liabilities for a public company includes procedures usually performed through the:
-Date of the auditors' report.
-Date the report is filed with the SEC.
-Day the audit report is issued.
-End of the client's year.Date of the auditors' report.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
-Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements.
-Notify the board of directors that the auditor's report must no longer be associated with the financial statements.
-Issue revised pro forma financial statements taking into consideration the newly discovered information.
-Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.The aggregated misstatement in the financial statements is made up of:
Factual Misstatements
Projected Misstatements
Judgmental MisstatementsYes, Yes, YesA possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
-Analytical process.
-Unasserted claim.
-Loss contingency.
-Probable loss.Loss contingency.In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items:
Required:
1. For each of the subsequent events, indicate whether they should result in:
Adjustment—an adjusting entry as of 20X3.
Consider Disclosure—consideration of note disclosure as of 20X3.
January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.AdjustmentJanuary 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.Consider DisclosureJanuary 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.Consider Disclosure
Depending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.AdjustmentOn January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.Consider Disclosure
Depending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.Which of the following is least likely to be considered a substantive procedure relating to payroll?
-Test whether employee time reports are approved by supervisors.
-Test commission earnings.
-Investigate fluctuations in salaries, wages, and commissions.
-Test computations of compensation under profit sharing for bonus plans.Test whether employee time reports are approved by supervisors.Which of the following is least likely to be considered a substantive procedure relating to payroll?Test whether employee time reports are approved by supervisors.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?Make a surprise observation of the company's regular distribution of paychecks on a test basis.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:Consider the possibility of a misstatement in the financial statements.When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?Capitalization.The search for unrecorded liabilities for a public company includes procedures usually performed through the:Date of the auditors' report.The aggregated misstatement in the financial statements is made up of:Known Misstatements - Yes
Projected Misstatements - Yes
Other Misstatements - YesA possible loss, stemming from past events that will be resolved as to existence and amount by some future event, is referred to as a(n):Loss contingency.Which of the following is most likely to be considered a Type 1 subsequent event?Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:February 10, 20X9.Which of the following procedures is most likely to be included in the final review stage of an audit?Perform analytical procedures.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?Settlement of litigation.January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.AdjustmentJanuary 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.DisclosureJanuary 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.No DisclosureOn January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.AdjustmentOn January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.No DisclosureOn January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada.The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.AdjustmentOn January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.AdjustmentOn January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.DisclosureOn February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.DisclosureOn February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.DisclosureA contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.CommitmentA possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.Contingent liabilityA possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.Loss contingencyAn approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.Iron curtain approachAn approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements(including projecting misstatements where appropriate) only during the current year.Rollover approachAn element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.General risk contingencyMisstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates.Likely misstatementsSpecific misstatements identified by the auditors during the course of the audit.Known misstatementsShortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances:The Financial statements should be adjusted - Yes
The event requires financial statement disclosure, but no adjustment - NO
The auditor's report should be modified for lack of consistency - NOAuditors should perform audit procedures relating to subsequent events?Through the date of the audit report.Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?Develop an estimate of the total likely misstatement in the financial statements.An example of an internal control weakness is to assign the personnel department responsibility for:Distribution of paychecks.Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?Confirming accounts payable.A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:Qualification of the audit report.In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:Known, projected, and other estimated misstatements in the financial statements.Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is:$0Which of the following is not correct relating to representation letters?They often serve as a substitute for the application of other procedures.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?"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."The search for unrecorded liabilities for a public company includes procedures usually performed through the:Date of the auditors' report.The aggregated misstatement in the financial statements is made up of:Known Misstatements - Yes
Projected Misstatements - Yes
Other Misstatements - YesA possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):Loss contingency.Which of the following is most likely to be considered a Type 1 subsequent event?Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:February 10, 20X9.Which of the following procedures is most likely to be included near completion of an audit?Perform analytical procedures.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?Settlement of litigation.The date of the management representation letter should coincide with the:date of the auditor's report.Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:the auditors' report.A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?A substantial portion of the company's inventory was written off as obsolete on January 31.Subsequent Event:
An employee strike is calledNot DisclosedSubsequent Event:
A lawsuit that was begun a year ago is settled.Adjusted (Type I)Subsequent Event:
A new subsidiary is purchasedDisclosed (Type II)Subsequent Event:
A major customer of the company is lostNot DisclosedSubsequent Event:
A significant decline in the value of inventories occursDisclosed (Type II)Subsequent Event:
A plant of the company is destroyed by a fireDisclosed (Type II)Subsequent Event:
On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.No DisclosureSubsequent Event:
On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.Adjusted (Type I)Subsequent Event:
On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.Disclosed (Type II)Subsequent Event:
On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.Disclosed (Type II)Subsequent Event:
On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.Disclosed (Type II)What is required in the wrap-up procedures?Final Analytical Procedures (cold partner review)What is the date of the audit report?Last day of field work (at client) - right in the middle of (A---B-*-C---D)Time Segment: AInterim (1/1/17 - 12/31/17)Time Segment: BSubsequent Period (12/31/17 - 3/15/18)Time Segment: CReport Preparation (3/15/18 - 3/22/18)Time Segment: DAfter Report (3/22/18 - )Type I - Examples:-Settlement of a Lawsuit (1/15/18)
-Two customers go bankrupt (1/24/18)
-Manufacturing Problems - Warranties (2/3/18)Type II - Examples:-Fire/flood
-Early retirement of bonds payable
-Sale of bond or capital stock issue
-Purchase of a business (it's YES/NO)
-Litigation that arises after B/S dateNeither - Examples:-New line of products
-Death of company treasurerWhat if something happens during the Report Preparation Period? (C)-Adjust (for Type I)
-Dual date the reportWhat if something happens After Report (D)?-Restatement of F/S
-Likely will lose client
-Inform B of D, audit committee, SEC, F/S usersContingency Losses: Probable - Reasonably EstimableAdjust F/SContingency Losses: Probable - Not Reasonably EstimableDisclosureContingency Losses: Reasonably PossibleDisclosureContingency Losses: RemoteNothingAsserted Claimsexisting lawsuitUnasserted Claimslawsuits thats have not been filedWho should the auditor contact if they want information about the contingencies/lawsuits?Client's Attorney/Lawyer's LetterWhat if the client's lawyer does not respond?Put the responsibility on the client (Scope Limitation)Management Representation Letter-Auditor Prepares this, Management Signs it
-Summarizes most important oral representations made during the year
1. All info made available to auditor
2. F/S are complete and follow GAAP
3. All necessary items have been disclosed
4. Adjusting entries are immaterialWhat date is used for the Management Representation Letter?Audit Report Date (last day of field work)What if the management doesn't sign it?Disclaimer of opinion (Scope Limitation)Management Letter:-Marketing Letter
-Auditors make recommendations to clientOther Information-financial and non financial information included in the audited F/S
-Include a paragraph about the other information if it is incorrectRequired Supplementary InformationFASB and GASB may require companies to include non-audited information in the F/S to summarize resultsEngagement Completion DocumentAuditor must complete this to identify significant findings or issues, actions taken to address them, and the basis for the conclusions reached. (public companies only)
-Ex: adjustments, disagreements, accounting principles, existence of misstatements, circumstances that caused difficultiesWhich of the following is not correct concerning a type I and a type II subsequent event?A type II event may require adjustment to the financial statements and a type I may require note disclosure.Which of the following procedures is normally performed last?Obtaining a management representation letter.Which of the following is true?The date the auditor grants the client permission to use the audit report in connection with the financial statements is the audit report release date.Significant defecencies must be communicated to:the audit committee in writing (whether or not they are material weaknesses)Material weaknesses must be communicated to:the audit report on internal controlShould uncorrected errors from previous years be corrected?YesEvaluation of Audit Findings to support an opinion:Includes both Quantitative and Qualitative informationWhich of the following is least likely to be considered a substantive procedure relating to payroll?Test whether employee time reports are approved by supervisorsWhich of the following is the best way for the auditors to determine that every name on a companies payroll is that of a bonafide employee presently on the job?Make a surprise observation of the company's regular distribution of paychecks on a test basis.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should :Consider the possibility of a misstatement in the financial statements.WHen auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?CapitalizationThe search for the unrecorded liabilities for a public company includes procedures usually performed through theDate of the auditors reportThe aggregated misstatement in the financial statements is made up ofKnown misstatements - Yes Projected misstatements - yes other misstatements - yesA possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):Loss contingencyWhich of the following is most likely to be considered a Type 1 subsequent event?Customer checks deposited prior to year-end but determined to be uncollectible after year-endAn auditor accepted an engagement to audit the 20X8 financial statements of EFG corporation and began the fieldwork on september 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X(. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The clients representation letter normally would be datedFebruary 10, 20X9Which of the following procedures is most likely to be included in the final review stage of an auditPerform analytical proceduresSubsequent to the issuance of the auditor's report the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should nextDetermine whether there are persons relying or likely to rely on the financial statements who would attach importance to the informationWhich of the following events occurring on January 5 20X2 is most likely to result in an adjusting entry to the 20X1 financial statementssettlement of litigationWhich of the following is least likely to be considered a substantive procedure relating to payroll?
Investigate fluctuations in salaries, wages, and commissions.
Test computations of compensation under profit sharing for bonus plans.
Test commission earnings.
Test whether employee time reports are approved by supervisors.Test whether employee time reports are approved by supervisors.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
Multiple Choice
Examine human resources records for accuracy and completeness.
Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.
Make a surprise observation of the company's regular distribution of paychecks on a test basis.
Visit the working areas and verify that employees exist by examining their badge or identification numbers.Make a surprise observation of the company's regular distribution of paychecks on a test basis.The search for unrecorded liabilities for a public company includes procedures usually performed through the:
Multiple Choice
Day the audit report is issued.
End of the client's year.
Date of the auditors' report.
Date the report is filed with the SEC.Date of the auditors' report.Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
Multiple Choice
A business combination.
Early retirement of bonds payable.
Settlement of litigation.
Plant closure due to a strike.Settlement of litigation.When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
Multiple Choice
Capitalization.
Financing.
Investing.
Operations.CapitalizationSubsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
Multiple Choice
Notify the board of directors that the auditor's report must no longer be associated with the financial statements.
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements.
Issue revised pro forma financial statements taking into consideration the newly discovered information.likely to rely on the financial statements who would attach importance to the information.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
Multiple Choice
Express an opinion that is qualified due to the inability of the client company to continue as a going concern.
Evaluate management's performance in causing this decline.
Require note disclosure.
Consider the possibility of a misstatement in the financial statements.Consider the possibility of a misstatement in the financial statements.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
Multiple Choice
December 31, 20X8.
January 17, 20X9.
February 10, 20X9.
February 16, 20X9.February 10, 20X9.Which of the following procedures is most likely to be included near completion of an audit?
Multiple Choice
Obtaining an understanding of internal control.
Confirmation of receivables.
Observation of inventory.
Performing analytical procedures.Performing analytical procedures.A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
Multiple Choice
Analytical process.
Loss contingency.
Probable loss.
Unasserted claim.Loss contingency.Which of the following is most likely to be considered a Type 1 subsequent event?
Multiple Choice
A business combination completed after year-end, but for which negotiations began prior to year-end.
A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago.
Customer checks deposited prior to year-end but determined to be uncollectible after year-end.
Introduction of a new line of products after year-end for which major research had been completed prior to year-end.Customer checks deposited prior to year-end but determined to be uncollectible after year-end.The aggregated misstatement in the financial statements is made up of:
Factual Misstatements Projected Misstatements Judgmental Misstatements
(1) Yes Yes Yes
(2) Yes Yes No
(3) No Yes No
(4) No Yes YesOption 1January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.
Adjustment or consider disclosureAdjustmentJanuary 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.
Adjustment or consider disclosureConsider disclsureJanuary 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.
Adjustment or consider disclosureConsider disclosureOn January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.
Adjustment or consider disclosureAdjustmentOn January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.
Adjustment or consider disclosureConsider disclosureDepending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.15 and 17On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.
Adjustment or consider disclosureAdjustmentOn January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.
Adjustment or consider disclosureAdjustmentOn January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.
Adjustment or consider disclosureConsider disclosureOn February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.
Adjustment or consider disclosureConsider disclosureOn February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.
Adjustment or consider disclosureConsider disclosureA contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.CommitmentA possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.Contingent liabilityA possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.Loss contingencyAn approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.Iron curtain approachAn approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.Rollover approachAn element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.General risk contingencyMisstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.Projected misstatementsMisstatements about which there is no doubt as to amount.Factual misstatementsWhich of the following is least likely to be considered a substantive procedure relating to payroll?Test whether employee time reports are approved by supervisors.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?Make a surprise observation of the company's regular distribution of paychecks on a test basis.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:Consider the possibility of a misstatement in the financial statements.When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?Capitalization.The search for unrecorded liabilities for a public company includes procedures usually performed through the:Date of the auditors' report.The aggregated misstatement in the financial statements is made up of:Known Misstatements - Yes
Projected Misstatements - Yes
Other Misstatements - YesA possible loss, stemming from past events that will be resolved as to existence and amount by some future event, is referred to as a(n):Loss contingency.Which of the following is most likely to be considered a Type 1 subsequent event?Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:February 10, 20X9.Which of the following procedures is most likely to be included in the final review stage of an audit?Perform analytical procedures.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?Settlement of litigation.January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.AdjustmentJanuary 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.DisclosureJanuary 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.No DisclosureOn January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.AdjustmentOn January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.No DisclosureOn January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada.The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.AdjustmentOn January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.AdjustmentOn January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.DisclosureOn February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.DisclosureOn February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.DisclosureA contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.CommitmentA possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.Contingent liabilityA possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.Loss contingencyAn approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.Iron curtain approachAn approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements(including projecting misstatements where appropriate) only during the current year.Rollover approachAn element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.General risk contingencyMisstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates.Likely misstatementsSpecific misstatements identified by the auditors during the course of the audit.Known misstatementsShortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances:The Financial statements should be adjusted - Yes
The event requires financial statement disclosure, but no adjustment - NO
The auditor's report should be modified for lack of consistency - NOAuditors should perform audit procedures relating to subsequent events?Through the date of the audit report.Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?Develop an estimate of the total likely misstatement in the financial statements.An example of an internal control weakness is to assign the personnel department responsibility for:Distribution of paychecks.Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?Confirming accounts payable.A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:Qualification of the audit report.In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:Known, projected, and other estimated misstatements in the financial statements.Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is:$0Which of the following is not correct relating to representation letters?They often serve as a substitute for the application of other procedures.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?"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."Which of the following is LEAST likely to be considered a substation procedure relating to payroll?
1. investigate fluctuations in salaries, wages, and commissions
2. test computations of compensation under profit sharing for bonus plans
3. test commission earnings
4. test whether employee time reports are approved by supervisors4. test whether employee time reports are approved by supervisors
Testing whether employee time reports are approved by supervisors is an example of a test of a control, not a substantive procedure.Which of the following is the BEST way for the auditors to determine that every name on a company's payroll is that of a real employee currently on the job?
1. examine human resources records for accuracy and completeness
2. examine employee's names listed on the payroll tax returns for agreement with payroll accounting records
3. make a surprise observation of the company's regular distribution of paychecks on a test basis
4. visit the working areas and verify that employees exist by examining their badge and ID numbers3. make a surprise observation of the company's regular distribution of paychecks on a test basis
The best procedure for the detection of a fictitious employee is a surprise observation of the distribution of paychecks. The fictitious employee's paycheck will ordinarily not be picked up, and further audit procedures performed by the auditors may reveal that this is a fictitious employee.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditors should...
1. express an opinion that is qualified due to the inability of the client company to continue as a going concern
2. evaluate management's performance in causing this decline
3. require note disclosure
4. consider the possibility of a misstatement of the financial statements4. consider the possibility of a misstatement of the financial statements
The purpose of analytical procedures is to locate potential misstatements in the financial statements. The auditors should investigate this significant fluctuation to determine whether it results from a financial statement misstatement.When auditing the statement of cash flows, which of the following would an auditor NOT expect to be a source of receipts and payments?
1. capitalization
2. financing
3. investing
4. operations1. capitalization
The three sections of a statement of cash flows relate to operations, financing, and investing. Capitalization is not one of the sections.The search for unrecorded liabilities for a public company includes procedures performed through the...
1. day the audit report is issued
2. end of the client's year
3. date of the auditor's report
4. date the report is filed with the SEC3. date of the auditor's report
The search for unrecorded liabilities should be completed as of the last day possible—ordinarily near the date of the audit report.The aggregated misstatement of the financial statements is made up of...The total likely misstatements composed of (a) known misstatements, (b) projected misstatements and (c) other misstatements.A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as...
1. analytical process
2. loss contingency
3. probable loss
4. unasserted claim2. loss contingency
A loss contingency is a possible loss stemming from past events that will be resolved in the future.Which of the following is MOST likely to be considered a Type 1 subsequent event?
1. a business combination completed after year-end, but for which negotiations began prior to year-end
2. a strike subsequent to year-end for to employee complaints about working conditions which originated two years ago
3. customer checks deposited prior to year-end but determined to be uncollectible after year-end
4. introduction of a new line of products after year-end for which major research had been completed prior to year-end3. customer checks deposited prior to year-end but determined to be uncollectible after year-end
A Type 1 subsequent event relates to a condition that came into effect before year-end; Type 1 subsequent events result in an adjusting journal entry. In this situation, the customer's check may be assumed to have been uncollectible at year-end, and therefore it would be considered to be a Type 1 subsequent event. The other three replies refer to events most ordinarily considered to be Type 2 events—the events came into existence after year-end.an auditor accepted an engagment to audit the 20X8 financial statements of EFG Corp and began fieldwork on Sep 30th, 20X8. EFG gave the auditor the 20X8 financial statements on Jan 17, 20X9. The auditor completed the audit on Feb 10, 20X9 and delivered the report on Feb 16, 20X9. The client's representation letter normally would be dated...
1. 12/31/20X8
2. 01/17/20X9
3. 02/10/20X9
4. 02/16/20X93. 02/10/20X9
The representation letter should be dated as of the date the audit was completed.Which of the following procedures is MOST likely to be included near the completion of an audit?
1. obtain an understanding of internal control
2. confirmation of receivables
3. observation of inventory
4. perform analytical procedures4. perform analytical procedures
The performance of analytical procedures is a required part of the final review stage of an audit and is therefore most likely to be included in that stage of the audit.After the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the info is reliable, the auditor should...
1. notify the BoD that the auditor's report must no longer be associated with the F/S
2. determine whether there are persons relying or likely to rely on the F/S who would attach importance to the info
3. request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issues F/S
4. issue a revised pro forma F/S taking into consideration the newly discovered info2. determine whether there are persons relying or likely to rely on the F/S who would attach importance to the info
When the auditor becomes aware of facts existing at the report date that would have affected the report, s/he should next determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. If such persons are believed to exist, the next step is to determine the best manner in which to disclose the information.Which of the following events occurring in Jan 5, 20X2 is most likely to result in an adjusting entry to the 20X1 F/S?
1. a business combination
2. early retirement of B/P
3. settlement of litigation
4. plant closure due to strike3. settlement of litigation
The settlement of litigation is most likely to result in an adjusting entry (i.e., be a "Type 1 subsequent event) because the cause of the litigation most likely occurred before 20X2.A material departure from GAAP will result in auditor consideration of...
1. whether to issue an adverse opinion rather than a disclaimer
2. whether to issue a disclaimer rather than a qualified op.
3. whether to issue an adverse op. rather than a qualified op.
4. nothing, because none of these opinions is applicable to this type of exception3. whether to issue an adverse op. rather than a qualified op.
When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.The auditors report should be dated as of the date the...
1. report is delivered to the client
2. auditors have accumulated sufficient evidence
3. fiscal period under audit ends
4. peer review of the working papers is completed2. auditors have accumulated sufficient evidence
The audit report should be dated no earlier than when the auditors have accumulated
sufficient appropriate evidence. This date is often the last day of fieldwork.In an audit report on combined F/S, reference to the fact that a portion of the audit was performed by a component auditor is...
1. not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms
2. not in accordance with GAAS
3. a qualification that lessens the collective responsibility of both CPA firms
4. an example of dual opinion requiring the signatures of both auditors1. not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms
Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.Assume that the opinion paragraph of an auditors report begins as follows: "With the explanation given in Note 6... the F/S referred to above present fairly..." This is...
1. an unmodified opinion
2. a disclaimer of opinion
3. an 'except for' opinion
4. an improper type of reporting4. an improper type of reporting
This phrase violates the fourth standard of reporting, because it does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the standard opinion paragraph, but is not forceful enough to constitute qualifying language.The auditors who wish to draw reader attention to a F/S note disclosure on significant transactions with related parties should disclose this fact in...
1. an emphasis-of-matter paragraph to the auditors report
2. a footnote on the F/S
3. the body of the F/S
4. the "summary of significant accounting policies" section of the F/S1. an emphasis-of-matter paragraph to the auditors report
The auditor communicates through the auditors' report and therefore only answer (1) is correct. Note that the client will include a discussion of the related party transactions in a note to the financial statements.What type(s) of audit opinion are appropriate when F/S are materially and pervasively misstated?When a misstatement is pervasive, an adverse opinion is appropriate.Which of the following ordinarily involves the addition of an "emphasis-of-matter" paragraph to an audit report?
1. a consistency modification
2. an adverse opinion
3. a qualified opinion
4. part of the audit has been performed by component auditors1. a consistency modification
A consistency modification results in an emphasis-of-matter paragraph. Qualified and adverse opinions include a basis for modification paragraph. When a report refers to component auditors no additional paragraph is added.An audit report for a public client indicates that the audit was performed in accordance with...
1. GAAS
2. standards of the PCAOB
3. GAAP
4. GAAP (PCAOB)2. standards of the PCAOB
An audit report of a public client indicates that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board (United States).When the matter is properly disclosed in the financial statement, the likely result of substantial doubt about the ability of the client to continue as a going concern in the issuance of what audit opinion...3. Unqualified with Emphasis-of-Matter
Substantial doubt about a client's ability to continue as a going concern results in either an unqualified report with explanatory language or a disclaimer of opinion. Accordingly answer (3) is correct since a qualified report is not appropriate.Which of the following is LEAST likely to result in inclusion of an emphasis-of-matter paragraph in an audit report?
1. the company is a component of a larger business enterprise
2. an unusually important significant event
3. a decision not to confirm AR
4. a risk of uncertainty3. a decision not to confirm AR
An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. Accordingly, answer (3) is not a situation in which an emphasis-of-matter paragraph is appropriate since confirming accounts receivable relates to the scope of the audit.As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor shouldConsider the possibility of a misstatement in the financial statements.An auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods: 2016 (4.3) 2015 (66.2) 2014 (7.3): Which of the following is the most likely cause of the decrease in accounts receivable turnover?Liberalization of credit policyAfter a CPA has determined that accounts receivable have increased as a result of slow collections in a "tight money" environment, the CPA will be likely toexpand tests of collectibilityWhich of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?Inspect the shipping records documenting the merchandise sold to the debtors.The negative form of accounts receivable confirmation request is useful except whenIndividual account balances are relatively largeThe return of a positive confirmation of accounts receivable without an exception attests to theaccuracy of the receivable balance.Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable?Vouch amounts in the subsidiary ledger to details on shipping documents.Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?Test a sample of sales transactions, selecting the sample from prenumbered shipping documents.The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion becausecustomers may not be inclined to report understatement errors in their accounts.Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable turnover?Allowance of a new grace period for customer paymentsAn auditor who is auditing accounts receivable would least likely perform which of the following tests?Select cash disbursements made shortly after year-end and examine the supporting documentation such as receiving reports and vendor invoices.The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, the auditor should:Send out a third confirmation request and if no response, perform alternative procedures.Substantive analytical procedures indicated a significant slowing in accounts receivable turnover.Expand the review of cash receipts after year-end to evaluate the collectibility of accounts receivable.The client entered into sales contracts with new customers that differ from the client's standard sales contracts.Send positive confirmations that include requests for information on side agreements and special terms.The client had a significant increase in sales near year-end.Increase the sample size for sales cutoff testing for sales recorded before year-end.Accounts receivable confirmations were ineffective due to a very low response rate in the prior year audit.Perform alternative procedures to test the existence and accuracy of accounts receivable instead of sending positive confirmations.The client began experiencing an increase in returns due to product changes that resulted in increased defects.Expand testing of sales returns after year-end and compare the level of returns with the prior year.You found several pricing errors in your substantive tests of transactions for sales.Increase the sample size for positive confirmations of accounts receivable.In performing substantive tests of transactions for cash receipts, you found that receipts were promptly recorded in customer accounts, but there were delays in depositing the receipts at the bank.While at the client's premises at year-end, obtain information on the last few cash receipts at year-end for cash receipts cutoff testing.The client entered into a new loan agreement with the bank. Accounts receivable are pledged as collateral for the loan.Send a confirmation to the bank confirming amounts pledged as collateral under loan agreements.The client did not reconcile the accounts receivable subsidiary records with the accounts receivable balance in the general ledger on a regular basis.Increase the number of accounts traced from the accounts receivable trial balance to the accounts receivable subsidiary records.How Materiality is set1st: Preliminary judgment is set for FS's as a whole
2nd: Performance materiality is set for each significant BS accountBalance Related Audit Objectives-Detail tie-in
-Existence
-Completeness
-Accuracy
-Classification
-Cutoff
-Realizable Value
-RightsTransaction Related Audit Objectives-Occurrence
-Completeness
-Accuracy
-Posting and summarization
-Classification
-TimingConfirmation of A/R-Most important/useful test of details of balances for A/R
-Helps with Existence, Accuracy, and Cutoff objectivesConservatismwhen two or more reasonable alternative values are indicated, the accountant will choose the lower amount, or the higher amount for liabilitiesIdentify items often misclassified as miscellaneous revenue.1. Collections on previously written-off accounts or notes receivable
2. Write-offs of old outstanding checks or unclaimed wages
3. Proceeds from sales of scrap
4. Rebates or refunds of insurance premiums
5. Proceeds from sales of plant assetsWhat substantive procedures are performed during the audit of selling, general and administrative expenses?1. Perform analytical procedures
a. Develop an expectation of the account balance
b. Determine the amount of difference from the expectation that can be accepted without investigation
c. Compare the company's account balance with the expected account balance
d. Investigate significant deviations from the expected account balance
2. Obtain or prepare analyses of selected expense accounts
3. Obtain or prepare analyses of critical expenses in income tax returnWhat substantive procedures are performed during the audit of payroll?1. Perform analytical procedures
2. Investigate fluctuations in salaries, wages, and commissions
3. Obtain a summary of amounts of officers' compensation and trace to authorization
4. Test the period end accrual of payroll expenses
5. Test computations of compensation under profit-sharing or bonus plans
7. Test commission earnings
8. Test pension obligationsLoss contingencya possible loss, stemming from past events that will be resolved as to existence and amount by some future eventGeneral risk contingencya loss that might occur in the future, such as possible price increases in essential raw materials, or a natural catastropheSubsequent eventsevents occurring after the balance sheet but prior to the date of the auditors' report; there are two types:
1. Those providing additional evidence as to conditions that existed at the date of the financial statements; financial statement amounts must be adjusted to reflect changes
2. Those involving conditions that arose after the financial statements; financial statements amounts do not have to be changedWhich of the following is least likely to be considered a substantive test relating to payrolls?Test whether employee time reports are approved by supervisors.When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?CapitalizationAs a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:Consider the possibility of a misstatement in the financial statements.The search for unrecorded liabilities for a public company includes procedures usually performed through theThe date of the auditors' reportSubsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?Make a surprise observation of the company's regular distribution of paychecks on a test basis.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:February 10, 20X9.Which of the following is LEAST likely to be considered a substantive procedure relating to payroll?Test whether employee time reports are approved by supervisorsWhich of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?Make a surprise observation of the company's regular distribution of paychecks on a test basisAs a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:Consider the possibility of a misstatement in the financial statementsWhen auditing the statement of cash flows, which of the following would an auditor NOT expect to be a source of receipts and payments?CapitalizationThe search for unrecorded liabilities for public company includes procedures usually performed through the:Date of the auditors' reportThe aggregated misstatement in the financial statements is made up of:Known Misstatements(yes), Projected Misstatements(yes),
Other Misstatements(yes)A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n)Loss contingencyWhich of the following is most likely to be considered a Type 1subsequent event?Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:February 10, 20X9Which of the following is most likely to be included near completion of an audit?Perform analytical proceduresSubsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the informationWhich of the following events occuring on January 5, 20X2, is most likely to result in an adjusting entry to 20X1 financial statements?Settlement of litigationWhich of the following is least likely to be considered a substantive procedure relating to payroll?
1) investigate fluctuations in salaries, wages, and commissions
2) test computations of compensation under profit sharing for bonus plans
3) test commission earnings
4) test whether employee time reports are approved by supervisors4) test whether employee time reports are approved by supervisorsWhich of the following is the best way for the auditors to determine that every name on a company payroll is that of a bona fide employee presently on the job?
1) examine HR records for accuracy and completeness
2) examine employees' names listed on payroll tax returns for agreement with payroll accounting records
3) make a surprise observation of the company's regular distribution of paychecks on a test basis
4) visit the working areas and verify that employees exist by examining their badge of ID numbers3) make a surprise observation of the company's regular distribution of paychecks on a test basisAs a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 20 percent in the preceding year to 20 percent in the current year. The auditors should:
1) express an opinion that is qualified due to the inability of the client company to continue as a going concern
2) evaluate management's performance in causing this decline
3) require note disclosure
4) consider the possibility of a misstatement in the financial statements4) consider the possibility of a misstatement in the financial statementsWhen auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
1) capitalization
2) financing
3) investing
4) operations1) capitalizationThe search for unrecorded liabilities for a public company includes procedures usually performed through the:
1) day the audit report is issued
2) end of the client's year
3) date of the auditors' report
4) date the report is filed with the SEC3) date of the auditors' reportA possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
1) analytical process
2) loss contingency
3) probable loss
4) unasserted claim2) loss contingencyWhich of the following is most likely to be considered a Type 1 subsequent event?
1) a business combination completed after year-end, but for which negotations began prior to year-end
2) a strike subsequent to year-end due to employee complaints about working conditions which originated two years ago
3) customer checks deposited prior to year-end, but determined to be uncollectible after year-end
4) introduction to a new line of products after year-end for which major research had been completed prior to year-end3) customer checks deposited prior to year-end, but determined to be uncollectible after year-endAn auditor accepts an engagement to audit the 20x8 financial statements of EFG Corporation and began the fieldwork on September 30, 20x8. EFG gave the auditor the 20x8 financial statements on January 17, 20x9. The auditor completed the audit on February 10, 20x9, and delivered the report on February 16, 20x9. The client's representation letter normally would be dated:
1) December 31, 20x8
2) January 17, 20x9
3) February 10, 20x9
4) February 16, 20x93) February 10, 20x9
The representation letter should be dated as of the date the audit was completed.Which of the following procedures is most likely to be included near completion of an audit?
1) obtain an understanding of internal control
2) confirmation of receivables
3) observation of inventory
4) performance of analytical procedures4) performance of analytical proceduresSubsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
1) notify the board of directors that the auditor's report must no longer be associated with the financial statements
2) determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information
3) request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements
4) issue revised pro forma financial statements taking into consideration the newly discovered information2) determine whether there are persons relying or likely to rely on the financial statements who would attach important to the informationWhich of the following events occurring on January 5, 20x2, is most likely to result in an adjusting entry to the 20x1 financial statements?
1) a business combination
2) early retirement of bonds payable
3) settlement of litigation
4) plant closure due to a strike3) settlement of litigationWhich of the following is least likely to be considered a substantive procedure relating to payroll?
a. Investigate fluctuations in salaries, wages, and commissions.
b. Test computations of compensation under profit sharing for bonus plans.
c. Test commission earnings.
d. Test whether employee time reports are approved by supervisors.d. Test whether employee time reports are approved by supervisors.Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
a. Examine human resources records for accuracy and completeness.
b. Examine employees' names listed on payroll tax returns for agreement with payroll accounting records.
c. Make a surprise observation of the company's regular distribution of paychecks on a test basis.
d. Visit the working areas and verify that employees exist by examining their badge or identification numbers.c. Make a surprise observation of the company's regular distribution of paychecks on a test basis.As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
a. Express an opinion that is qualified due to the inability of the client company to continue as a going concern.
b. Evaluate management's performance in causing this decline.
c. Require note disclosure.
d. Consider the possibility of a misstatement in the financial statements.d. Consider the possibility of a misstatement in the financial statements.The search for unrecorded liabilities for a public company includes procedures usually performed through the:
a. Day the audit report is issued.
b. End of the client's year.
c. Date of the auditors' report.
d. Date the report is filed with the SEC.c. Date of the auditors' report.A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
a. Analytical process.
b. Loss contingency.
c. Probable loss.
d. Unasserted claim.b. Loss contingency.Which of the following is most likely to be considered a Type 1 subsequent event?
a. A business combination completed after year-end, but for which negotiations began prior to year-end.
b. A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago.
c. Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.
d. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.c. Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.Which of the following procedures is most likely to be included near completion of an audit?
a. Obtain an understanding of internal control.
b. Confirmation of receivables.
c. Observation of inventory.
d. Perform analytical procedures.d. Perform analytical procedures.Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
a. Notify the board of directors that the auditor's report must no longer be associated with the financial statements.
b. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
c. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements.
d. Issue revised pro forma financial statements taking into consideration the newly discovered information.b. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that:
a. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.
b. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
c. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work.
d. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.d. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
a. Sales and Cost of Goods Sold.
b. Interest and Bad Debt Expense.
c. Sales and Bad Debt Expense.
d. Interest and Cost of Goods Sold.c. Sales and Bad Debt Expense.Auditors should perform audit procedures relating to subsequent events?
a. Through year-end.
b. Through issuance of the audit report.
c. Through the date of the audit report.
d. For a reasonable period after year-end.c. Through the date of the audit report.Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
a. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements.
b. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
c. Determine whether reportable conditions have been corrected.
d. Develop an estimate of the total likely misstatement in the financial statements.d. Develop an estimate of the total likely misstatement in the financial statements.Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
a. Obtaining a lawyers' letter.
b. Confirming accounts payable.
c. Reviewing the minutes of board of directors' meetings.
d. Review correspondence with banks.b. Confirming accounts payableWhich of the following types of matters do not generally require disclosure in the financial statements?
a. General risk contingencies.
b. Commitments.
c. Loss contingencies.
d. Liabilities to related parties.a. General risk contingencies.Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows:
a. If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report.
b. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report.
c. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure.
d. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.d. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
a. Confirmation of related lawsuits with the claimants.
b. Qualification of the audit report.
c. An assessment that loss of the litigation is probable.
d. An adverse opinion.b. Qualification of the audit report.If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
a. Attempt to determine whether their report is still being relied upon by third parties.
b. Notify regulatory agencies.
c. Notify legal counsel.
d. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.a. Attempt to determine whether their report is still being relied upon by third parties.Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?
a. Review minutes of board of directors' meeting.
b. Review the latest available interim financial statements.
c. Inquire about any unusual adjustments made subsequent to the balance sheet date.
d. Review changes in internal control during the period subsequent to the balance sheet date.d. Review changes in internal control during the period subsequent to the balance sheet date.Which of the following subsequent events might require an adjustment to the client's financial statements?
a. A business combination with another company.
b. Loss on the sale of a closely-held investment.
c. Loss of plant and equipment due to a fire.
d. Retirement of bonds payable at a loss.b. Loss on the sale of a closely-held investment.Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
a. Dividends.
b. New debt issuance.
c. New bank accounts.
d. Write-off of trade accounts receivable.d. Write-off of trade accounts receivable.Which of the following is not a procedure normally performed while completing the audit of a public company?
a. Obtain a lawyer's letter.
b. Obtain a representations letter.
c. Perform an overall review using analytical procedures.
d. Confirm directly with shareholders the total capital stock held by each.d. Confirm directly with shareholders the total capital stock held by each.Auditors must communicate internal control "significant deficiencies" to:
a. The audit committee.
b. The shareholders.
c. The SEC.
d. The Federal Trade Commission.a. The audit committee.The review of audit working papers by the audit partner is normally completed:
a. Prior to year-end.
b. Immediately as each working paper is completed.
c. Near the completion of the audit.
d. After issuance of the audit report, but prior to required subsequent event review procedures.c. Near the completion of the audit.A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $100,000 represents a material amount. Assuming that the entire understatement is to be recorded based on SEC SAB 108, the decrease in this year's income due to these understatements is:
$0.
$60,000.
$110,000.
$140,000.$140,000.A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $55,000 represents a material amount. Assuming that the entire understatement is to be recorded based on SEC SAB 108, the decrease in this year's income due to these understatements is:
$0.
$60,000.
$110,000.
$140,000.$60,000.One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
a. Weaknesses of a material nature in internal control.
b. Noncompliance with prescribed control procedures.
c. Improper separation of accounting and other financial duties.
d. Unusual transactions.d. Unusual transactionsWhich of the following is an analytical procedure that should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents.
b. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement.
c. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.
d. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.d. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?
a. Separation of payroll duties is less than adequate for effective internal control.
b.total payroll costs are a significant part of total operating costs.
c. The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year.
d. Employee turnover is excessive.a. Separation of payroll duties is less than adequate for effective internal control.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 which is expected to double the sales volume.
d. Settlement of litigation in excess of the recorded liability.d. Settlement of litigation in excess of the recorded liability.With respect to issuance of an audit report which is dual-dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report is:
a. Extended to include all events occurring until the date of the last subsequent event referred to.
b. Limited to the specific event referred to.
c. Limited to all events occurring through the date of issuance of the report.
d. Extended to include all events occurring through the date of submission of the report to the client.b. Limited to the specific event referred to.Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
a. An estimate of the dollar amount of the probable loss.
b. An expert opinion as to whether a loss is possible, probable, or remote.
c. Information concerning the progress of cases to date.
d. Corroborative audit evidence.d. Corroborative audit evidenceThe auditors' primary means of obtaining corroboration of management's information concerning litigation is a:
a. Letter of audit inquiry to the client'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.a. Letter of audit inquiry to the client's lawyer.The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:
a. Last day of significant field work.
b. Report cutoff date.
c. Report release date.
d. Representation date.c. Report release date.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?
a. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
b. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."
c. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities."
d. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."a. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."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 possible unasserted litigation, claims, and assessments.d.. Identify possible unasserted litigation, claims, and assessments
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