Chapter 14 – Activities Required in Completing a Quality Audit
a.
True
b.
False
True
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AUDT.JOHN.16.14-13 – LO: 14-13
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Communicating with Management via the Management Letter
79. A management letter is the same as a management representation letter.
a.
True
b.
False
False
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AUDT.JOHN.16.14-13 – LO: 14-13
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Communicating with Management via the Management Letter
80. A management letter is not required.
a.
True
b.
False
True
1
AUDT.JOHN.16.14-13 – LO: 14-13
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Communicating with Management via the Management Letter
81. After the auditor completes the current audit, an issue of importance for subsequent year audits is mandatory
partner rotation.
a.
True
b.
False
True
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AUDT.JOHN.16.14-13 – LO: 14-13
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Communicating with Management via the Management Letter
82. Audit firm culture plays a role in audit firm portfolio management in that some audit firms are willing to
provide audits to riskier clients, while other audit firms are not willing to do so.
Chapter 14 – Activities Required in Completing a Quality Audit
a.
True
b.
False
True
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AUDT.JOHN.16.14-14 – LO: 14-14
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Client Continuance Decisions
83. In addition to risk factors, an important consideration in client continuance decisions involves the audit
firm’s growth strategy.
a.
True
b.
False
True
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AUDT.JOHN.16.14-14 – LO: 14-14
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Client Continuance Decisions
84. Audit firm portfolio management decisions are not important in achieving audit quality.
a.
True
b.
False
False
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AUDT.JOHN.16.14-14 – LO: 14-14
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Client Continuance Decisions
85. If an audit firm accepts or continues to provide audits to a client firm with ineffective internal controls over
financial reporting, the management representation letter will note that an adverse opinion will likely be issued.
a.
True
b.
False
False
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AUDT.JOHN.16.14-14 – LO: 14-14
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Client Continuance Decisions
86. The familiarity threat is the most relevant issue for mandatory partner or audit firm rotation.
Chapter 14 – Activities Required in Completing a Quality Audit
a.
True
b.
False
True
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AUDT.JOHN.16.14-15 – LO: 14-15
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Partner Rotation and Audit Firm Rotation
87. Rules are standardized internationally in terms of mandatory partner rotation and mandatory audit firm
rotation.
a.
True
b.
False
False
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AUDT.JOHN.16.14-15 – LO: 14-15
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Partner Rotation and Audit Firm Rotation
88. A cooling off period is the number of years after which the individual auditor or audit firm may resume its
prior role with the audit client.
a.
True
b.
False
True
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AUDT.JOHN.16.14-15 – LO: 14-15
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Partner Rotation and Audit Firm Rotation
89. The AICPA Auditing Standards Board (ASB) requires a 5-year mandatory cooling off period for partner
rotation.
a.
True
b.
False
False
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AUDT.JOHN.16.14-15 – LO: 14-15
United States – BUSPORG: Analytic
90. The Public Company Accounting Oversight Board (PCAOB) requires mandatory audit firm rotation after
six years, with a cooling off period of four years.
a.
True
b.
False
False
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AUDT.JOHN.16.14-15 – LO: 14-15
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Partner Rotation and Audit Firm Rotation
91. Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover
effects of prior-year uncorrected misstatements. Which of the following statements regarding this process is
false?
a.
Adjustments made to correct the financial statements are referred to as booked.
b.
Possible adjustments to the financial statements that are left uncorrected are referred to as waived.
c.
Tax effects are not shown on schedules of correcting errors.
d.
The nature of the misstatement, as well as the quantitative amount, is considered in the judgment of
materiality.
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AUDT.JOHN.16.14-01 – LO: 14-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing, Summarizing and Resolving Detected Misstatements
92. During the course of an audit, misstatements that are individually immaterial may be detected. What should
the auditor do with these?
a.
Permanently pass on these immaterial misstatements as they do not individually impact the financial
statements.
b.
Request that management footnote the immaterial misstatements in the financial statements for fair
presentation.
c.
Accumulate all of the known and projected misstatements to determine if the impact is material in
the aggregate.
d.
Roll them forward for three years when they will become material enough to adjust.
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AUDT.JOHN.16.14-01 – LO: 14-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
93. Which of the following is one of the most important drivers of audit quality in cases where an auditor may
Chapter 14 – Activities Required in Completing a Quality Audit
feel some pressure to acquiesce to management’s demands to not require that misstatements be corrected in
order to preserve a harmonious working relationship?
a.
Firm culture.
b.
Ethics training.
c.
Annual income of the CPA firm.
d.
PCAOB guidance.
AUDT.JOHN.16.14-01 – LO: 14-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing, Summarizing and Resolving Detected Misstatements
94. Which of the following would be considered “the nature of a misstatement” that might make it material?
a.
Comparing the sum of known and projected misstatements to total current assets.
b.
Comparing the sum of known and projected misstatements to total current liabilities.
c.
Comparing the sum of known and projected misstatements to pretax income.
d.
Having the effect of changing a positive earnings trend to a negative earnings trend.
AUDT.JOHN.16.14-01 – LO: 14-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing, Summarizing and Resolving Detected Misstatements
95. An audit firm culture that emphasizes “doing the right thing” does not incorporate which of the following to
enhance audit quality?
a.
Encouraging auditors to seek consultation with other members of the audit firm.
b.
Yielding to management’s demands in order to promote additional service engagements.
c.
Taking sufficient time to deal with difficult client issues.
d.
Emphasizing long-term reputation over the immediate satisfaction of client preferences.
AUDT.JOHN.16.14-01 – LO: 14-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing, Summarizing and Resolving Detected Misstatements
96. Which of the following are categories that do not reflect the contingent nature of losses and the guiding
criteria organized around probability of outcomes as provided by the FASB?
a.
Guaranteed.
b.
Reasonably possible.
Chapter 14 – Activities Required in Completing a Quality Audit
c.
Remote.
d.
Probable.
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AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
97. Which of the following types of information is not a type of evidence that the auditor should obtain
concerning contingencies?
a.
Information about major contracts in which contingencies may be present.
b.
Documentation of communication with internal and external legal counsel of the client.
c.
Accounts receivable confirmations.
d.
Documentation of contingent liabilities contained in corporate minutes, correspondence from
governmental agencies, and bank confirmations.
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United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
98. Which of the following items does the auditor ask the client to send to its legal counsel requesting
information about asserted claims?
a.
A letter of audit inquiry.
b.
A management representation letter.
c.
A management letter.
d.
A loss reserve confirmation.
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AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
99. Which of the following items is not typically requested from the lawyer of a company regarding
contingencies?
a.
Any limitations on the lawyer’s response such as not devoting substantial attention to the item or that
the amounts are not material.
b.
Information about the attorney’s other clients with similar contingencies.
c.
A description of each contingency, as well as progress and action that the company plans to take.
Chapter 14 – Activities Required in Completing a Quality Audit
d.
A comment on the completeness of management’s list of contingencies and an evaluation.
b
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AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
100. When responding to the auditor as a result of the audit client’s letter of inquiry, how might the attorney
limit the response?
a.
Limit the response to litigations in process.
b.
Limit the response to asserted claims.
c.
Limit the response to matters to which the attorney has given substantive attention in the form of
legal consultation or representation.
d.
Limit the response to items which the attorney believes will result in loss to the client.
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AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
101. Which of the following parties has the responsibility for designing and maintaining policies and procedures
to identify, evaluate, and account for contingencies?
a.
Management.
b.
The auditor.
c.
The audit committee.
d.
The client’s attorney.
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AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
102. When requiring a letter of audit inquiry from the client’s attorney, which of the following information will
be requested?
a.
A statement regarding conflicts of interest that the attorney may have with the client.
b.
The attorney’s expert opinion of proper GAAP treatment related to client contingencies.
c.
An evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies.
d.
Possible auditor defenses for third-party litigation related to ordinary negligence claims.
103. Assume a situation in which an attorney who provided significant litigation counsel to a client to refuses to
furnish information requested in an audit. Which of the following descriptions best describes this situation from
the auditor’s perspective?
a.
A departure from GAAP.
b.
A scope limitation.
c.
A violation of the attorney-client privilege.
d.
A contingent liability.
AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
104. Fulton Educational Company, Inc. has a matter of material litigation that is threatened, but that has not
gone to trial. The auditor’s consideration of such a matter will not include which of the following?
a.
Sending a letter to the client’s attorneys for more information.
b.
Discussing the matter with the client and their insurance adjuster.
c.
Confirming with the harmed party regarding the amount that will be claimed.
d.
Assessing whether accrual or disclosure by the client was reported in accordance with GAAP.
AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
105. In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment
provided by management to the auditor, which of the following is the client’s lawyer not requested to provide?
a.
Information on the completeness of management’s list.
b.
Information on the compliance of the disclosures with GAAP.
c.
Information on the likelihood and range of possible losses.
d.
Information on any limitations on the lawyer’s response.
AUDT.JOHN.16.14-02 – LO: 14-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
106. When evaluating accounting estimates, the auditor would not concentrate on which of the following key
factors and assumptions?
a.
Those that are within budgetary expectations.
b.
Those that are subjective and susceptible to misstatement and bias.
c.
Those that are inconsistent with current economic trends.
d.
Those that are sensitive to variations.
AUDT.JOHN.16.14-03 – LO: 14-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Significant Estimates
107. In evaluating the reasonableness of an estimate, the auditor would not normally concentrate on which of
the following factors and assumptions?
a.
Subjective judgments that introduce bias.
b.
Deviations from historical patterns.
c.
Amounts that are inconsistent with current economic trends.
d.
All of these are a focus of the auditor regarding reasonable estimates.
AUDT.JOHN.16.14-03 – LO: 14-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Significant Estimates
108. Which of the following is not a reason why the auditor needs to take special care to review significant
estimates in the financial statements?
a.
Organizations may try to use the estimates to “smooth” earnings.
b.
Organizations may create hidden reserves in unusually good years that can be used in years when
real profits do not meet expectations.
c.
Companies may underestimate liabilities or impairment of asset values to achieve reported earning
goals in years when real profits to not meet expectations.
d.
Companies may try to overestimate liabilities in computing leverage ratios.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Appropriate Accounting for Loss Contingencies
109. Which of the following is not true regarding accounting estimates?
a.
Accounting estimates are based on management’s knowledge and experience of past and current
events.
b.
Accounting estimates are based on management’s assumptions about conditions that are expected to
exist and courses of action the company expects to take.
c.
Accounting estimates are based on both subjective and objective factors
d.
Because accounting estimates are based, in part, on management’s knowledge and experience, they
are not biased.
AUDT.JOHN.16.14-03 – LO: 14-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Significant Estimates
110. The client makes estimates relative to recorded amounts in the financial statements. Which of the
following assumptions best represents the auditor’s primary focus regarding the reasonableness of such
estimates?
a.
That historical trends are followed.
b.
That income is managed.
c.
That there is an adequate cushion.
d.
That management reverses estimates when opportune.
AUDT.JOHN.16.14-03 – LO: 14-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Significant Estimates
111. Which of the following is false regarding the use of an audit checklist for disclosures?
a.
It is a convenient documentation format.
b.
It reminds the auditor of matters that should be considered for disclosure.
c.
It can be organized to include relevant professional guidance.
d.
It covers all potential unusual circumstances.
United States – AK – AICPA BB-Critical thinking
Reviewing Significant Estimates
112. Which one of the following is false regarding the adequacy of disclosures in a financial statement audit?
a.
The auditor should consider matters for disclosure while gathering evidence during the course of the
audit, not just at the end of the audit.
b.
One of the key disclosures is a summary of significant accounting policies used by the company.
c.
Disclosures should be limited to only checklist items.
d.
The auditor’s report does not specifically cover the statements made by management in the
“Management Discussion and Analysis” (MD&A) section of the annual report.
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AUDT.JOHN.16.14-04 – LO: 14-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing the Adequacy of Disclosures
113. Assessing disclosures does not require reasonable assurance of which of the following?
a.
The disclosures are understandable to users.
b.
Disclosed events and transactions have occurred and pertain to the entity.
c.
All material and immaterial disclosures have been reported.
d.
The information is disclosed accurately and at appropriate amounts.
1
AUDT.JOHN.16.14-04 – LO: 14-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing the Adequacy of Disclosures
114. Which of the following is a tool that is best used by the audit team to determine if the client has included
all disclosures?
a.
Management representation letter.
b.
GAAS.
c.
Inquiry of the CFO.
d.
Checklists.
d
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United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
115. Which of the following is not an inherent limitation in an auditor’s ability to detect material misstatements
Reviewing the Adequacy of Disclosures
Chapter 14 – Activities Required in Completing a Quality Audit
relating to a client’s compliance with laws and regulations?
a.
Laws and regulations often relate to operational issues within the entity that do not necessarily relate
to the financial statements, so the information systems relating to financial reporting may not capture
noncompliance.
b.
The legal implications of noncompliance are ultimately a matter for legal authorities to resolve, and
are not a matter about which the auditor can resolve.
c.
Management may act to conceal noncompliance, or may override controls, or may intentionally
misrepresent facts to the auditor.
d.
Auditors are not required to consider the applicable legal and regulatory frameworks that apply to the
entity.
d
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AUDT.JOHN.16.14-05 – LO: 14-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Review and Assess Noncompliance with Laws and Regulations
116. What should an auditor do when becoming aware of violations of the FCPA?
a.
Contact foreign officials in the country where the client has business operations.
b.
Notify the audit committee about the violations, their circumstance, and the effect on the financial
statements.
c.
Contact the U.S. marshals.
d.
Design internal controls to deter improper payments.
b
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United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Review and Assess Noncompliance with Laws and Regulations
117. Which of the following is not a main provision of the Foreign Corrupt Practices Act of 1977 (FCPA)?
a.
No U.S. person or companies that have securities listed on U.S. markets may make a payment to a
foreign official for the purpose of obtaining or retaining business.
b.
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.
c.
Designing and maintaining internal accounting controls is the role of internal auditors when
management conducts business in a foreign country.
d.
Certain payments made to an official to expedite the performance of the duties that the official would
already be bound to perform are acceptable.
AUDT.JOHN.16.14-05 – LO: 14-05
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118. On what information does the auditor base a going concern evaluation?
a.
On separate procedures.
b.
On the management discussion and analysis (MD&A).
c.
On information obtained from normal audit procedures performed to test management’s assertions.
d.
On the statement of cash flows for the current period.
1
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
119. Which of the following is not an indicator of a potential going-concern problem?
a.
Negative trends in profitability.
b.
External matters increasing regulatory requirements.
c.
Significant changes in competition.
d.
An Altman Z-score above 3.0.
d
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AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
120. If the auditor concludes that there may be a going-concern problem, which of the following is not typically
evaluated to determine the reasonableness of management’s plans to overcome this problem?
a.
Management’s assumption about increasing prices or market share in relationship to current industry
developments.
b.
Management’s assumptions about cost savings related to a reduction in the work force should be
recomputed and evaluated to determine any hidden costs.
c.
Management’s past track record related to delaying unnecessary expenditures.
d.
Management’s assumptions about selling off assets and their relationship to current market prices.
1
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Review and Assess Noncompliance with Laws and Regulations
121. If conclusion is drawn that there may be a going concern problem, which of the following should the
auditor do?
a.
Withdraw from the engagement.
b.
Issue a qualified or adverse opinion.
c.
Identify and assess management’s plan to overcome the problem.
d.
Communicate this fact with management that is one level above the controller.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
122. If the auditor concludes that there may be a going-concern problem with the client, which of the following
is the best course of action for the auditor to follow?
a.
Issue a qualified opinion.
b.
Identify and assess management’s plan to overcome the situation.
c.
Chart the negative trends as an addendum to the audit report.
d.
Increase fees to cover the probable exposure.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
123. Which one of the following would the auditor consider to be an indication of a potential going-concern
problem?
a.
Loss of the controller to a competitor.
b.
Improper reporting of internal controls by management.
c.
Adverse key financial ratios.
d.
Large increase to sales in the month previous to year-end.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
124. Which one of the following is not a key condition indicating doubt about a client’s ability to continue as a
going-concern?
a.
Adverse key financial ratios.
Chapter 14 – Activities Required in Completing a Quality Audit
b.
Employee strike that halts operations for several months.
c.
Company has not paid dividends to date.
d.
Default on bank debt.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
125. The auditor is responsible for evaluating the likelihood of a client continuing as a going concern for a
reasonable period of time. What is considered to be a reasonable time period?
a.
One year from the audit report date.
b.
One year from the last day of field work.
c.
One year from the balance sheet date.
d.
Two years from the balance sheet date.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
126. The auditor is responsible for evaluating the likelihood of a client not being a going concern for the next 12
months. What basis will the auditor use to assess this issue?
a.
Management integrity.
b.
Control environment.
c.
Absolute assurance.
d.
Substantial doubt.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
127. Which of the following is not a potential indicator of going concern problems for a client?
a.
Negative trends in key financial ratios.
b.
Loss of key personnel.
c.
Plan to sell nonessential assets.
d.
Default on a loan.
Chapter 14 – Activities Required in Completing a Quality Audit
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
128. If substantial doubt remains about going concern for a client at the end of the audit, then which of the
following reports should the auditor typically issue?
a.
Issue an unqualified audit report.
b.
Issue an unqualified audit report with an explanatory paragraph.
c.
Issue a qualified report.
d.
Issue an adverse report.
AUDT.JOHN.16.14-06 – LO: 14-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating the Going-Concern Assumption
129. Which of the following is not a typical analytical procedure for the completion of the audit?
a.
Ratio analysis.
b.
Common-size analysis.
c.
Changes from the prior year.
d.
All of the above would typically be used.
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
130. Before releasing the audit report, which of the following would the auditor most likely do?
a.
Issue a management letter.
b.
Perform an analytical review.
c.
Check on a schedule of partner rotation.
d.
Estimate client fee for subsequent services to be performed.
131. During which of the following phases of the audit are analytical review procedures required by the auditing
standards?
a.
The planning phase of the audit.
b.
The final review phase of the audit.
c.
Both the planning and final review phases of the audit.
d.
Performance of tests of controls.
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
132. Which of the following statement is false regarding analytical procedures that help auditors assess the
overall final presentation of the financial statements?
a.
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.
b.
A basic five step process for using analytical procedures applies.
c.
Analytical procedures provide evidence on whether certain relationships make sense in light of the
knowledge obtained during the audit.
d.
Auditing standards require the use of analytical procedures in the final review phase of the audit to
assist in identifying ending account relationships that are unusual.
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
133. Which of the following activities is not a step in the process for using analytical procedures?
a.
Define when the difference between the auditor’s expectation and the client’s balance would be
considered significant.
b.
Compute the difference between the auditor’s expectation and the client’s balance.
c.
Perform appropriate followup on all material and immaterial differences.
d.
Develop an expectation.
United States – AK – AICPA BB-Critical thinking
Performing Analytical Review of the Financial Statements
134. Analytical procedures conducted at the end of an audit are performed to examine trends and changes. What
is typically another purpose of analytical procedures at the end of the audit?
a.
To document planning in accordance with GAAS.
b.
To provide the client with a value added service in conjunction with audit activities.
c.
To ask “hard questions” about the company’s results and its relationship to external factors.
d.
To increase the amount of items reported in the management letter.
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
135. Which of the following procedures is the least useful analytical procedure to indicate that further audit
work needs to be performed before rendering the audit opinion?
a.
Developing a common-size analysis.
b.
Analyzing the dollar and percentage changes in each income statement item over the previous year.
c.
Comparing current earnings per share with earnings per share of the client’s primary competitor.
d.
Developing a ratio analysis.
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
136. Which of the following is not a purpose of the management representation letter?
a.
It reminds management of its responsibility for the financial statements.
b.
It confirms oral responses obtained by the auditor earlier in the audit and the continuing
appropriateness of those responses.
c.
It decreases the possibility of misunderstanding concerning the matters that are the subject of the
representations.
d.
It implies that the auditor is responsible for the design of the internal controls.
d
1
AUDT.JOHN.16.14-08 – LO: 14-08
United States – AK – AICPA BB-Critical thinking
Performing Analytical Review of the Financial Statements
137. Management of AllTech, Inc. refuses to sign the management representation letter given to them in the
course of the audit on the grounds that it invades the company’s privacy. What does this refusal constitute?
a.
A violation of full and fair disclosure.
b.
A securities law violation.
c.
A scope limitation.
d.
A breakdown in internal controls.
1
AUDT.JOHN.16.14-08 – LO: 14-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating Management Representations
138. Which one of the following is not a purpose of the management representation letter?
a.
It clearly documents the audit procedures that were performed by the auditors.
b.
It further acknowledges management’s responsibility for the financial statements.
c.
It confirms oral responses obtained by the auditor earlier in the audit and the continuing
appropriateness of those responses.
d.
It reduces the possibility of misunderstanding concerning the matters that are the subject of the
representations.
1
AUDT.JOHN.16.14-08 – LO: 14-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating Management Representations
139. Which of the following individuals should sign the management representation letter?
a.
The members of the audit committee and board of directors.
b.
The chief executive officer and the chief financial officer.
c.
The chief financial officer and the treasurer.
d.
The controller and the auditor.
b
1
AUDT.JOHN.16.14-08 – LO: 14-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Evaluating Management Representations
140. The date of the audit opinion of Upton Industries, Inc. reads: March 7, 2014 except for Note D, as to which
the date is March 12, 2014. What is this an example of?
Chapter 14 – Activities Required in Completing a Quality Audit
a.
Improper reporting.
b.
A GAAP violation.
c.
Dual dating.
d.
A contingent event.
AUDT.JOHN.16.14-09 – LO: 14-09
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Subsequent Events
141. Assume that a major customer of the company that you are auditing files for bankruptcy during the
subsequent period because of a deteriorating financial condition. Neither you nor the client becomes aware of
the event until the bankruptcy filing is reported. What type of subsequent event would this be?
a.
Type I subsequent event
b.
Type II subsequent event
c.
Neither Type I or Type II
d.
Both Type I and Type II
AUDT.JOHN.16.14-09 – LO: 14-09
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Reviewing Subsequent Events
142. Which of the following would be a Type II subsequent event?
a.
Information becomes available that provides evidence about the valuation of an estimate or reserve
that had been accrued at year end.
b.
A sale of inventory below carrying value provides evidence that the net realizable value was less than
cost at year end.
c.
A stock dividend or split that takes place during the subsequent period should be disclosed. In
addition, earnings-per-share figures should be adjusted to show the retroactive effect of the stock
dividend or split.
d.
A material change occurs in the value of investment securities after the balance sheet date.
AUDT.JOHN.16.14-09 – LO: 14-09
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
143. Which one of the following subsequent events will least likely result in an adjustment to the financial