Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
14) Which of the following statements is correct?
A) A letter of representation is documentation of management's acceptance of responsibility for
the financial statements and is deemed to be reliable evidence.
B) A letter of representation is not deemed to be reliable evidence because of the potential
incompetence of management.
C) A letter of representation is not deemed to be reliable evidence because it is a written
statement from a nonindependent source.
D) A letter of representation is documentation of the CPA's acceptance of responsibility for the
audit of the financial statement and is deemed to be reliable.
15) Auditing standards require the auditor to ________ other information included in annual
reports pertaining directly to the financial statements.
A) audit
B) express an opinion on
C) read
D) analyze
16) An auditor must obtain written client representations that might be signed by all but which of
the following?
A) treasurer
B) chief financial officer
C) vice president of operations
D) chief executive officer
17) Which of the following is not a reason why the auditor requests that the client provide a
letter of representation?
A) Professional auditing standards require the auditor to obtain a letter of representation.
B) It impresses upon management its responsibility for the accuracy of the information in the
financial statements.
C) It provides written documentation of the oral responses already received to inquiries of
management.
D) It determines the type of opinion the auditor will issue on the financial statements.
18) At the completion of the audit, management is asked to make a written statement that it is not
aware of any undisclosed contingent liabilities. This statement would appear in the
A) management letter.
B) letter of inquiry.
C) letters testamentary.
D) management letter of representation.
19) What two steps must an auditor take if they have reservations about the audit client
continuing as a going concern?
20) State the three purposes of the management representation letter.
21) List four specific matters that should be included in a client representation letter.
22) Besides the search for contingent liabilities and the review for subsequent events, the auditor
has four important final evidence accumulation responsibilities, all of which are required by
current professional auditing standards. Discuss each of these four responsibilities.
23) Current professional auditing standards require the performance of analytical procedures
during the planning and completion phases of the audit.
24) Current professional auditing standards mandate the use of analytical procedures during the
testing phase of the audit.
25) Auditing standards require the auditor's assessment of going concern issues.
26) Results from the final analytical procedures may indicate that additional audit evidence is
necessary.
27) Although the letter of representation is typed on the client's letterhead and signed by the
client, it is common for the auditor to prepare the letter.
28) Auditors of public companies must obtain certain representations from management
regarding internal control over financial reporting.
29) At the completion of the audit, management is typically asked to make a written statement as
a part of the engagement letter that it is aware of no undisclosed contingent liabilities.
30) Auditors are required to obtain a letter of representation that describes management's planned
solutions to all internal control weaknesses identified during an audit.
31) The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's
chief executive officer, and signed by the audit engagement partner.
32) If the client refuses to prepare and sign a letter of representation, the auditor would be
required to issue either a qualified opinion or a disclaimer of opinion.
33) Because a management representation letter is a written statement from a nonindependent
source, it cannot be regarded as reliable evidence.
24.6 Learning Objective 24-6
1) To make a final evaluation as to whether sufficient appropriate evidence has been
accumulated, the auditor will do all of the following except
A) review the audit documentation for the entire audit to determine whether all material classes
of transactions have been adequately tested.
B) make sure that all parts of the audit program have been accurately completed and
documented.
C) obtain the management representation letter.
D) decide whether the audit program is adequate.
2) When reviewing the summary of misstatements found in the audit
A) an adjusting journal entry must be made by the auditor for all material misstatements.
B) auditors must combine individually immaterial misstatements to evaluate whether the
combined amount is material.
C) the auditor is not required to consider the impact on the current financial statements of
misstatements in the prior year that were not corrected.
D) auditors only need to consider the misstatements that impact the income statement.
3) Which of the following is an accurate statement regarding audit documentation review?
A) The audit partner must review the work of the least experienced auditor in more detail than
the work of the audit supervisor.
B) The audit senior must review all audit documentation.
C) For larger audits, it is common to have the financial statements and the entire set of audit files
reviewed by someone who has not participated in the audit, but is a member of the audit firm
doing the audit.
D) Checklists can never be used to verify that all financial statement disclosures have been made.
4) There are three reasons why an experienced member of the audit firm must thoroughly review
audit documentation of the completion of the audit, including
A) to evaluate the performance of inexperienced personnel.
B) to make sure that the audit meets the CPA firm's standard of performance.
C) to counteract the bias that often enters into the auditor's judgment.
D) all of the above.
5) Match seven of the terms (a-p) with the description/definitions provided below (1-7):
a. commitments
b. completing the engagement checklist
c. contingent liability
d. dual-dated audit report
e. financial statement disclosure checklist
f. independent review
g. inquiry of client's attorneys
h. letter of representation
i. other information in annual reports
j. review for subsequent events
k. subsequent events
l. unadjusted misstatement worksheet
m. management letter
n. pending claim
o. unasserted claim
p. Audit documentation review
________ 1. a review of the financial statements and the entire set of audit files by an
independent reviewer to whom the audit team must justify the evidence accumulated and the
conclusions reached
________ 2. a potential future obligation to an outside party for an unknown amount resulting
from activities that have already taken place
________ 3. a written communication from the client to the auditor formalizing statements that
the client has made about matters pertinent to the audit
________ 4. a potential legal claim against a client where the condition for a claim exists but no
claim has been filed
________ 5. transactions that occurred after the balance sheet date, which affect the fair
presentation or disclosure of the statements being audited
________ 6. agreements that the entity will hold to a fixed set of conditions, such as the purchase
or sale of merchandise at a stated price
________ 7. the use of one audit report date for normal subsequent events and a later date for
one or more subsequent events
6) List the three reasons why an experienced member of the audit firm must thoroughly review
audit documentation at the completion of the audit.
7) An independent review must be performed of all audits.
8) If, during the completion phase of the audit, the auditor determines that he or she has not
obtained sufficient evidence to draw a conclusion about the fairness of the client's financial
statements, there are two choices: accumulate additional evidence or issue either a qualified or an
adverse opinion.
9) After performing all audit procedures in each area, the auditor must integrate the results into
an overall conclusion about the financial statements.
24.7 Learning Objective 24-7
1) The auditor is responsible for communicating significant internal control deficiencies to the
audit committee, or those charged with governance. This communication
A) may be oral or written.
B) must be oral.
C) must be written.
D) must be oral via direct communication.
2) Which of the following statements is most correct about an auditor's required communication
with management and those charged with corporate governance?
A) The auditor is required to inform those charged with governance about significant errors
discovered and subsequently corrected by management.
B) Any significant matter reported to those charged with governance must also be communicated
to management.
C) Communication is required before the audit report is issued.
D) The auditor does not have any requirement to communicate with anyone other than the
company's senior management.
3) While there is no professional requirement to do so on audit engagements, CPAs frequently
issue a formal "management" letter to clients. The primary purpose of this letter is to provide
A) evidence indicating whether the auditor is reasonably certain that internal accounting control
is operating as prescribed.
B) a permanent record of the internal accounting control work performed by the auditor during
the course of the engagement.
C) the client with the CPA's recommendations for improving any part of the client's business.
D) a summary of the auditor's observations that resulted from the auditor's special study of
internal control.
4) When communicating with the audit committee and management,
A) only material fraud and illegal acts are required by auditing standards to be communicated.
B) all internal control deficiencies 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 actions.
D) all communications with the audit committee and management must be in writing.
5) 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.
6) List the four principal purposes of the required communication with the audit committee
regarding certain additional information obtained during the audit.
7) Auditors are required to communicate either orally or in writing with the audit committee
about internal control weaknesses.
8) The Sarbanes-Oxley Act includes additional communication requirements for auditors of
public companies.
9) Client representation letters are required by professional auditing standards, whereas
management letters are optional.
24.8 Learning Objective 24-8
1) The audit firm issues an audit report for its client. The auditors have no obligation to make
further inquiries with respect to the client's audited financial statements unless
A) a development occurs that may affect the company's long term viability as a company.
B) final resolution was made on disclosed contingency for which no liability needed to be
accrued.
C) new information comes to the auditor's attention concerning an event that occurred prior to
the date of the audit report that, if known, would have impacted the audit opinion.
D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's
favor.
2) The fieldwork for the December 31, 2016 audit of Treble Corporation ended on March 17,
2017. The financial statements and auditor's report were issued and mailed to stockholders on
March 29, 2017. In each of the material situations (1 through 5) below, indicate the appropriate
action (a, b, c, d, or e). The possible actions are as follows:
a. Adjust the December 31, 2016 financial statements.
b. Disclose the information in a footnote in the December 31, 2016 financial statements.
c. Request the client revise and reissue the December 31, 2016 financial statements. The
revision should involve an adjustment to the December 31, 2016 financial statements.
d. Request the client revise and reissue the December 31, 2016 financial statements. The
revision should involve the addition of a footnote, but no adjustment, to the December 31, 2016
financial statements.
e. No action is required.
The situations are as follows:
________ 1. On January 16, 2017 a lawsuit was filed against Treble for a patent infringement
action that allegedly took place in early 2014. In the opinion of Treble's attorneys, there is a
reasonable (but not probable) danger of a significant loss to Treble.
________ 2. On February 19, 2017, Treble settled a lawsuit out of court that had originated in
2015 and is currently listed as a contingent liability.
________ 3. On March 30, 2017, Treble settled a lawsuit out of court that had originated in 2014
and is currently listed as a contingent liability.
________ 4. On February 2, 2017, you discovered an uninsured lawsuit against Treble that had
originated on August 30, 2013. There is a reasonable (but not probable) danger of a significant
loss to Treble.
________ 5. On April 7, 2017, you discovered that a debtor of Treble went bankrupt on January
22, 2017, due to a major uninsured fire that occurred on January 2, 2017.
3) If an auditor discovers that previously issued financial statements are misleading, the most
desirable approach to follow is to request that the client issue an immediate revision of the
financial statements containing an explanation of the reasons for the revision.
4) Subsequent discoveries of facts requiring the reissuance of financial statements arise from
events occurring after the date of the auditor's report.
