Auditing Ch 24

The​ auditor's primary concern relative to presentation and disclosure-related objectives is

a. existence

b. accuracy

c. occurance

d. completeness

d. completeness

If a potential loss on a contingent liability is​ remote, the liability usually is

a. disclosed in the​ auditor's report but not disclosed on the financial statements

b. accrued and indicated in the body of the financial statements

c. disclosed in​ footnotes, but not accrued

d. neither accrued nor disclosed in footnotes

d. neither accrued nor disclosed in footnotes

Which of the following is not considered a commitment?

a. agreements to purchase raw materials

b. pension plans

c. agreements to lease facilities at set prices

d. each of these is a commitment

d. each of these is a commitment

If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted​ claims,

a. the attorney can no longer represent the client

b. the attorney may face sanctions from the American Bar Association

c. the auditor must withdraw from the engagement

d. the auditors must modify their audit report to reflect the lack of available evidence

d. the auditors must modify their audit report to reflect the lack of available evidence

An auditor has the responsibility to actively search for subsequent events that occur subsequent to the

a. date of the management representation letter

b. balance sheet​ date, but prior to the audit report

c. date of the​ auditor's report

d. balance sheet date

b. balance sheet​ date, but prior to the audit report

The issuance of bonds by the client subsequent to the balance sheet date would require a footnote disclosure​ in, but no adjustment​ to, the financial statements under audit. T/F

True

Which of the following is not one of the categories of items included in the letter of representation?

a. subsequent events

b. completeness of information

c. recognition, measurement, and disclosure

d. materiality

d. materiality

After performing all audit procedures in each area, the auditor must integrate the results into an overall conclusion about the financial statements. T/F

True

Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee

a. only if the act is immaterial

b. only if the act is material

c. only if the act is highly material

d. regardless of materiality

d. regardless of materiality

As part of phase IV of the​ audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation and disclosure-related objectives. T/F

True

If an auditor concludes there are contingent​ liabilities, then he or she must evaluate the

a. Materiality of the potential liability: Yes; Nature of the disclosure to be included in the financial statements: No

b. Materiality of the potential liability: No; Nature of the disclosure to be included in the financial statements: Yes

c. Materiality of the potential liability: Yes; Nature of the disclosure to be included in the financial statements: Yes

d. Materiality of the potential liability: No; Nature of the disclosure to be included in the financial statements: No

c. Materiality of the potential liability: Yes; Nature of the disclosure to be included in the financial statements: Yes

Auditors will generally send a standard inquiry to the​ client's attorney letter to

a. only the attorney who represents the client in proceeding where the client is defendant

b. only those attorneys who have devoted substantial time to client matters during the year

c. every attorney that the client has been involved with in the current or preceding​ year, plus any attorney the client engages on occasion

d. every attorney whose legal fees for the year exceed a materiality threshold

c. every attorney that the client has been involved with in the current or preceding​ year, plus any attorney the client engages on occasion

Attorneys must report material violations of federal securities laws to the​ company's audit committee. T/F

True

Whenever subsequent events are used to evaluate the amounts included in the​ statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation

a. took place before the balance sheet date

b. are reimbursable through insurance policies

c. occurred both before and after the balance sheet date

d. did not take place until after the balance sheet date

d. did not take place until after the balance sheet date

Which of the following would be a subsequent discovery of facts which would not require a response by the​ auditor?

a. discovery of the failure to write off material obsolete inventory

b. discovery of the inclusion of material nonexistent sales

c. discovery of the omission of a material footnote

d. discovery of​ management's intent to increase selling prices in the future

d. discovery of​ management's intent to increase selling prices in the future

Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent

a. the culmination of conditions that existed at the balance sheet date

b. additional new information related to events that were in existence on the balance sheet date

c. final estimates of losses relating to casualties occurring in the subsequent events period

d. preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

b. additional new information related to events that were in existence on the balance sheet date

Which of the following would the auditor expect to find in the​ client's management representation​ letter?

a. management's goals for improving earnings per share

b. management's compliance with contractual arrangements that impact the financial statements

c. management's plans for improving product quality

d. management's recommendations for system of internal control effectiveness improvements

b. management's compliance with contractual arrangements that impact the financial statements

Refusal by a client to prepare and sign the representation letter would require the auditor to issue​ a(n)

a. qualified or an adverse opinion

b. qualified opinion or a disclaimer of opinion

c. adverse opinion or a disclaimer of opinion

d. unqualified opinion with an explanatory paragraph

b. qualified opinion or a disclaimer of opinion

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

a. reconciliation of interest expense with debt outstanding

b. confirmation of bank balances

c. review compliance with the terms of debt agreements

d. confirmation of accounts receivable from principal customers

c. review compliance with the terms of debt agreements

When reviewing the summary of misstatements found in the​ audit,

a. auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material

b. the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected

c. an adjusting journal entry must be made by the auditor for all material misstatements

d. auditors only need to consider the misstatements that impact the income statement

a. auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material

When communicating with the audit committee and​ management,

a. all system of internal control deficiencies are required by auditing standards to be communicated

b. all communications with the audit committee and management must be in writing

c. the communications should be made in a timely manner to allow those charged with governance to take appropriate

d. only material fraud and illegal acts are required by auditing standards to be communicated

c. the communications should be made in a timely manner to allow those charged with governance to take appropriate

A client acquired​ 25% of its outstanding capital stock after year end but prior to the date of the​ auditor's report. The auditor should

a. issue pro forma financial statements giving effect to the acquisition as if it had occurred at year end

b. disclose the acquisition in the opinion paragraph of the​ auditor's report

c. advise management to adjust the balance sheet to reflect the acquisition

d. advise management to disclose the acquisition in the notes to the financial statements

d. advise management to disclose the acquisition in the notes to the financial statements

Which of the following statements is correct about an​ auditor's required communication with those charged with​ governance?

a. Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance

b. The auditor should not communicate frequently recurring misstatements unless they are material

c. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management

d. Any matters communicated with those charged with governance are also required to be communicated to the​ entity's management

c. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management

In addition to making management​ inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of

a. reviewing derivative transactions reflected on the​ quarter-end balance sheet

b. obtaining a client representation letter

c. discussing sales contracts with the sales manager

d. reviewing the status of​ long-term leases

a. reviewing derivative transactions reflected on the​ quarter-end balance sheet