Chapter 14 – Activities Required in Completing a Quality Audit
1. Review activities that are completed towards the end of the audit are quite varied.
a.
True
b.
False
True
AUDT.JOHN.16.14-01 – LO: 14-01
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Reviewing, Summarizing and Resolving Detected Misstatements
2. Misstatements that are detected, but individually are not material, should be ignored when determining the
appropriate audit report.
a.
True
b.
False
False
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Reviewing, Summarizing and Resolving Detected Misstatements
3. Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover
effects of prior-year uncorrected misstatements.
a.
True
b.
False
True
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Reviewing, Summarizing and Resolving Detected Misstatements
4. At the end of an audit, adjustments that are “waived” will remain uncorrected.
a.
True
b.
False
True
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5. The auditor compares the total likely misstatements to each significant segment of the financial statements,
such as total current assets, total noncurrent assets, total current liabilities, total noncurrent liabilities, owners’
equity, and pretax income, to determine if they are, in aggregate, material to the financial statements.
a.
True
b.
False
True
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Reviewing, Summarizing and Resolving Detected Misstatements
6. The total likely misstatements found during the audit are equal to the sum of known and projected
misstatements.
a.
True
b.
False
True
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Reviewing, Summarizing and Resolving Detected Misstatements
7. The materiality of a misstatement is based on only the quantitative amount of the misstatement.
a.
True
b.
False
False
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Reviewing, Summarizing and Resolving Detected Misstatements
8. An audit firm culture that emphasizes “doing the right thing,” encourages auditors to deal with difficult issues
in a short period of time.
a.
True
b.
False
False
1
9. A culture that encourages auditors to seek consultation with other members of the audit firm will be more
likely to result in auditors who will acquiesce to inappropriate or aggressive client preferences.
a.
True
b.
False
False
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Reviewing, Summarizing and Resolving Detected Misstatements
10. PCAOB AS 14 provides important insight that auditors must consider as they decide whether management’s
refusal to correct a detected misstatement is indicative of intentional bias.
a.
True
b.
False
True
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Reviewing, Summarizing and Resolving Detected Misstatements
11. In an integrated audit, if one or more material weaknesses exist, the auditor will need to issue a qualified
opinion on internal control over financial reporting.
a.
True
b.
False
False
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Reviewing, Summarizing and Resolving Detected Misstatements
12. Multiple internal control deficiencies in the same cycle may actually decrease the likelihood of misstatement
in that cycle.
a.
True
b.
False
False
Reviewing, Summarizing and Resolving Detected Misstatements
13. FASB has set forth four categories of potential losses that can be reasonably estimated.
a.
True
b.
False
False
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Appropriate Accounting for Loss Contingencies
14. Auditors are responsible for designing and maintaining policies and procedures to identify, evaluate, and
account for contingencies.
a.
True
b.
False
False
1
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Appropriate Accounting for Loss Contingencies
15. The primary source of evidence concerning contingencies is the client’s external attorney.
a.
True
b.
False
False
1
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Appropriate Accounting for Loss Contingencies
16. Regarding loss contingencies, legal counsel should be instructed by the client to respond directly to the
auditors.
a.
True
b.
False
United States – BUSPORG: Analytic
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Reviewing, Summarizing and Resolving Detected Misstatements
17. If a lawyer refuses to furnish the requested information about the client’s contingencies to the auditor, the
auditor should issue an unqualified audit opinion.
a.
True
b.
False
False
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Appropriate Accounting for Loss Contingencies
18. Property and casualty insurance premiums are examples of estimates found on financial statements.
a.
True
b.
False
False
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United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Significant Estimates
19. Auditors should have heightened skepticism regarding period-end adjusting journal entries that relate to
accounts with significant estimates.
a.
True
b.
False
True
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Reviewing Significant Estimates
20. Estimates are based on both subjective and objective factors.
a.
True
b.
False
United States – BUSPORG: Analytic
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Appropriate Accounting for Loss Contingencies
21. Events or transactions occurring after the balance sheet date and before the audit report date, can be useful
in identifying and evaluating the reasonableness of estimates.
a.
True
b.
False
True
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Reviewing Significant Estimates
22. A deviation from historical patterns is one of the factors that an auditor focuses on when evaluating the
reasonableness of an estimate.
a.
True
b.
False
True
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Reviewing Significant Estimates
23. The auditor should consider the historical experience of the client in making past estimates.
a.
True
b.
False
True
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Reviewing Significant Estimates
24. A policy providing a reserve for returned products at the original sales price rather than at replacement cost
violates GAAP.
a.
True
b.
False
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Reviewing Significant Estimates
25. If the auditor determines that informative disclosures are not reasonably adequate, the auditor must identify
that fact in the auditor’s report.
a.
True
b.
False
True
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United States – AK – AICPA BB-Critical thinking
Reviewing the Adequacy of Disclosures
26. Disclosures can be made either on the face of the financial statements in the form of classifications or in
parenthetical notations and/or in the notes to the statements.
a.
True
b.
False
True
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United States – AK – AICPA BB-Critical thinking
Reviewing the Adequacy of Disclosures
27. A disclosure checklist is a convenient documentation format for evidence that the auditor adequately
evaluated the client’s disclosures.
a.
True
b.
False
True
1
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Reviewing the Adequacy of Disclosures
28. The auditor should consider matters for disclosure only while gathering evidence during the course of the
audit.
a.
True
b.
False
AUDT.JOHN.16.14-03 – LO: 14-03
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Reviewing Significant Estimates
Chapter 14 – Activities Required in Completing a Quality Audit
False
1
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Reviewing the Adequacy of Disclosures
29. The auditor’s report specifically covers the statements and disclosures made by management in the
“Management Discussion and Analysis” (MD&A) section of the annual report.
a.
True
b.
False
False
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Reviewing the Adequacy of Disclosures
30. Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information
that is factually inaccurate or inconsistent with the audited portion of the financial statements and
accompanying footnotes.
a.
True
b.
False
True
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Reviewing the Adequacy of Disclosures
31. Noncompliance with laws and regulations includes only acts of omission by the entity that are considered to
be unintentional and contrary to the prevailing laws or regulations.
a.
True
b.
False
32. Auditing standards recognize that there are inherent limitations in an auditor’s ability to detect material
Chapter 14 – Activities Required in Completing a Quality Audit
misstatements relating to the entity’s compliance with laws and regulations.
a.
True
b.
False
33. Auditors are responsible for obtaining reasonable assurance that the financial statements are free from
material misstatements, including material misstatements related to noncompliance with laws and regulations.
a.
True
b.
False
34. When obtaining reasonable assurance that the financial statements are free from material misstatements,
auditors should consider the applicable legal and regulatory frameworks that apply to the entity.
a.
True
b.
False
35. If management or those charged with governance do not demonstrate a commitment to internal control over
noncompliance with laws and regulations, then the auditor should withdraw from the engagement.
a.
True
b.
False
36. According to the Foreign Corrupt Practices Act of 1977 (FCPA), companies that have securities listed on
U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the
company and design and maintain an adequate system of internal accounting controls.
a.
True
b.
False
37. If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA), the auditor
should notify the CFO about the violations, their circumstance, and the effect on the financial statements.
a.
True
b.
False
38. If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client
from government officials, this is not considered a violation of the Foreign Corrupt Practices Act of 1977
(FCPA).
a.
True
b.
False
39. Auditors are required to evaluate the likelihood of each client continuing as a going concern for a reasonable
period into the foreseeable future.
a.
True
b.
False
40. If the auditor continues to have substantial doubt about the client continuing as a going concern, the auditor
should evaluate the adequacy of the client’s related disclosures.
a.
True
b.
False
True
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United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
41. An audit opinion is a guarantee that the business is a going concern.
a.
True
b.
False
False
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United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
42. The going-concern evaluation must be based on separate procedures that test the client’s ability to continue
as a going concern.
a.
True
b.
False
False
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Evaluating the Going-Concern Assumption
43. Two paragraphs should be added to the auditor’s report when the auditor concludes that substantial doubt
remains about the client’s ability to continue as a going concern for a reasonable period of time.
a.
True
b.
False
United States – BUSPORG: Analytic
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Evaluating the Going-Concern Assumption
44. Management will often resist a going-concern modification because investors, lenders, and customers may
lose faith in the business.
a.
True
b.
False
True
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United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
45. Some auditors may be reluctant to issue a going-concern audit opinion because it may hasten the failure of
the client company.
a.
True
b.
False
True
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Evaluating the Going-Concern Assumption
46. Significant changes in the competitive market and a decrease in the competitiveness of the client’s products
are potential indicators of going-concern problems.
a.
True
b.
False
True
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Evaluating the Going-Concern Assumption
47. A number of studies of bankruptcies have shown that certain combinations of ratios, like the Altman Z-
score, have good predictive power in indicating the likelihood of bankruptcy.
a.
True
b.
False
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Evaluating the Going-Concern Assumption
Chapter 14 – Activities Required in Completing a Quality Audit
True
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Evaluating the Going-Concern Assumption
48. Research has shown that auditors’ qualifications of audit reports are better predictors of going-concern
problems than are Z-score models.
a.
True
b.
False
False
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Evaluating the Going-Concern Assumption
49. Analytical procedures help auditors assess the overall presentation of the financial statements.
a.
True
b.
False
True
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United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Performing Analytical Review of the Financial Statements
50. By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained
relationships that should be resolved before the issuance of the audit report.
a.
True
b.
False
True
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Performing Analytical Review of the Financial Statements
51. Analytical procedures may indicate that new controls need to be designed before completing the audit.
a.
True
b.
False
Chapter 14 – Activities Required in Completing a Quality Audit
False
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Performing Analytical Review of the Financial Statements
52. Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income
statement item over the previous year are useful for this purpose.
a.
True
b.
False
True
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United States – AK – AICPA BB-Critical thinking
Performing Analytical Review of the Financial Statements
53. Analytical procedures conducted during the final review phase of the audit should corroborate conclusions
formed during the audit, which enables the auditor to draw conclusions upon which to base the audit opinion.
a.
True
b.
False
True
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Performing Analytical Review of the Financial Statements
54. When management is unable to provide an explanation for a previously unrecognized risk identified through
the analytical procedures, the auditor must issue an adverse opinion.
a.
True
b.
False
False
1
AUDT.JOHN.16.14-07 – LO: 14-07
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Performing Analytical Review of the Financial Statements
55. The auditor should apply a basic three-step process for using analytical procedures during the final review.
a.
True
Chapter 14 – Activities Required in Completing a Quality Audit
b.
False
False
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Performing Analytical Review of the Financial Statements
56. The auditor’s expectations in final analytical procedures must be more precise than those for substantive
analytics.
a.
True
b.
False
False
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Performing Analytical Review of the Financial Statements
57. The signing officers for the certifications under the Sarbanes-Oxley Act are typically the controller and the
treasurer of the company.
a.
True
b.
False
False
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Evaluating Management Representations
58. In a quality audit, the auditor will review management’s processes for certification to provide reasonable
assurance that those processes are adequate and that they can be relied upon.
a.
True
b.
False
True
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Evaluating Management Representations
59. Auditors should obtain a management representation letter at the end of each audit.
Chapter 14 – Activities Required in Completing a Quality Audit
a.
True
b.
False
True
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Evaluating Management Representations
60. Management’s refusal to sign the management representation letter is considered a scope limitation
sufficient to preclude the issuance of an unqualified opinion.
a.
True
b.
False
True
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Evaluating Management Representations
61. Type I subsequent events indicate conditions that did not exist at the balance sheet date, but that may require
disclosure.
a.
True
b.
False
False
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Reviewing Subsequent Events
62. An example of a Type I subsequent event would be a significant lawsuit that is initiated relating to an
incident that occurred after the balance sheet date.
a.
True
b.
False
False
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63. Procedures such as a cutoff test and a search for unrecorded liabilities are related to subsequent events.
a.
True
b.
False
True
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United States – AK – AICPA BB-Critical thinking
Reviewing Subsequent Events
64. When the auditor becomes aware of an event that occurs after the audit report date, but before the issuance
of the audit report to the client and the event is disclosed in the footnotes, the auditor would date the report as if
this fact had been known at year-end.
a.
True
b.
False
False
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Reviewing Subsequent Events
65. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and
audit report due to subsequent events after issuance of the audit report, the auditor should not try to obtain client
cooperation, but should immediately notify any regulatory agency having jurisdiction over the client, such as
the SEC, that the audit report should no longer be associated with the client’s financial statements.
a.
True
b.
False
False
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Reviewing Subsequent Events
66. An additional procedure related to subsequent events is the reading of the meeting minutes for the board of
directors meeting.
a.
True
b.
False
True
67. If an omission of an important audit procedure is discovered, the auditor should immediately issue a
disclaimer of opinion for the audit.
a.
True
b.
False
False
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Consideration of Omitted Procedures Discovered after the Report Date
68. If omitted audit procedures cannot be performed, the auditor should extend previous work done and modify
the report, if necessary.
a.
True
b.
False
True
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Consideration of Omitted Procedures Discovered after the Report Date
69. Typically, omissions may be discovered when audit documentation is reviewed as part of an external or
internal review program.
a.
True
b.
False
True
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Consideration of Omitted Procedures Discovered after the Report Date
70. When it is discovered that an important audit procedure was not performed, the SEC imposes sanctions
against the audit firm responsible.
a.
True
b.
False
False
United States – BUSPORG: Analytic
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Reviewing Subsequent Events
71. As part of a quality audit, the audit firm must have policies and procedures in place for conducting an
engagement quality review of each audit before issuing the audit opinion for public companies.
a.
True
b.
False
True
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Performing an Engagement Quality Review
72. If an experienced reviewer who was not a part of the audit team, but who has appropriate competence,
independence, integrity, and objectivity, performs an independent quality review, this is referred to as a
reoccurring partner review.
a.
True
b.
False
False
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Performing an Engagement Quality Review
73. The engagement quality review is a risk-based review.
a.
True
b.
False
True
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Performing an Engagement Quality Review
74. The audit documentation when performing an engagement quality review should include such information
such as how much the firm paid for the review.
a.
True
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Consideration of Omitted Procedures Discovered after the Report Date
Chapter 14 – Activities Required in Completing a Quality Audit
b.
False
False
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Performing an Engagement Quality Review
75. It is important that the external auditor have a constructive and detailed dialogue with the audit committee
on important aspects of the audit.
a.
True
b.
False
True
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Responsibilities of External Auditors to Communicate with the Audit Committee
76. The audit committee is typically independent of the board of directors.
a.
True
b.
False
False
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Responsibilities of External Auditors to Communicate with the Audit Committee
77. All major accounting disagreements with management, even if eventually resolved, should be discussed
with the audit committee.
a.
True
b.
False
True
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Responsibilities of External Auditors to Communicate with the Audit Committee
78. The auditor generally reports things that management could do better in a management letter as a
constructive part of the audit.