Chapter 14 – Activities Required in Completing a Quality Audit
statements?
a.
Material change in the amount of settlement of a lawsuit which had been estimated at year end.
b.
Bankruptcy of a customer who owes your client a material amount on open account at year end for
which there is an inadequate allowance estimate.
c.
Sale of a large block of inventory at a price materially below carrying value.
d.
Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.
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United States – AK – AICPA BB-Critical thinking
Reviewing Subsequent Events
144. Which one of the following would be the most effective procedure for discovering material Type II
subsequent events?
a.
Updating the search for unrecorded liabilities.
b.
Resending all bank confirmations returned.
c.
Reading of the minutes of board of directors’ meetings
d.
Surprise cash count at random locations.
AUDT.JOHN.16.14-09 – LO: 14-09
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Reviewing Subsequent Events
145. After completing the audit report of Blair Corporation, but before delivering the audit report to the client, a
tornado demolished the main production facility. In this case, what option is available to the auditor other than
dual dating the report?
a.
Use the original audit report date.
b.
Go back to the client’s office and extend testing to the date of the tornado, thereby taking
responsibility for all events up to the date of the tornado.
c.
Report the situation in the management representation letter.
d.
Issue a scope limitation.
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146. When a subsequent event provides evidence about conditions that existed at the balance sheet date, what is
Chapter 14 – Activities Required in Completing a Quality Audit
the best course of action for the auditor to follow?
a.
Assign a specialist.
b.
Ensure that the financial statements are adjusted to reflect the information, including any necessary
footnote disclosures.
c.
Shop for an opinion that fits the desired type of event.
d.
Provide management with a new engagement letter to document the terms of the revised
arrangement.
b
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Reviewing Subsequent Events
147. When a subsequent event provides evidence about conditions that did not exist at the balance sheet date,
what is the best course of action for the auditor to follow?
a.
Ensure that any necessary footnote disclosures be included with the statements.
b.
Ensure that the financial statements are adjusted to reflect the information, including any necessary
footnote disclosures.
c.
Give an inappropriate opinion.
d.
Provide management with a new engagement letter to document the terms of the revised
arrangement.
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United States – AK – AICPA BB-Critical thinking
Reviewing Subsequent Events
148. Which of the following is the best example of a Type I subsequent event?
a.
A related-party transaction occurs during the course of the audit.
b.
The company defaults on its line-of-credit with the bank subsequent to year end but previous to the
release of the audit opinion.
c.
Litigation that was accrued as a liability in the year under audit is settled subsequent to year-end for
an amount in excess of estimates.
d.
The company initiates an initial public offering subsequent to year-end.
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149. Which one of the following is not an example of an additional procedure that typically relates to the
discovery of subsequent events?
a.
Partner review of all workpapers.
b.
Reading interim financial statements and comparing them to the audited statements to note
significant changes.
c.
Reading the board of directors’ minutes for all meetings during the year and after year- end through
the end of field work.
d.
Management inquiry.
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Reviewing Subsequent Events
150. Which one of the following is the best example of a Type II subsequent event?
a.
b.
c.
d.
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Reviewing Subsequent Events
151. Which of the following correctly states the period for which the auditor is responsible for subsequent
events?
a.
The balance sheet date to the date the audit report is issued.
b.
The balance sheet date to the end of field work.
c.
The balance sheet date to the date of subsequent discovery of omitted procedures.
d.
All of the above.
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Reviewing Subsequent Events
152. After an audit report is issued, the auditor discovers through a peer review that an important audit
procedure has been omitted. In this case, what should the auditor do?
Chapter 14 – Activities Required in Completing a Quality Audit
a.
Notify all parties known to be relying on the report.
b.
Immediately request the client recall the report.
c.
Contact his or her professional liability insurance carrier.
d.
Determine whether the report can still be supported in light of the omitted procedure.
d
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Consideration of Omitted Procedures Discovered after the Report Date
153. If the auditor failed to confirm receivables when that should have been done and it may be too late to
confirm now, what should the auditor do?
a.
Issue an adverse opinion.
b.
Extend the previous work done on subsequent collections to help determine that the receivables
existed and were properly valued at the balance sheet date
c.
Automatically decide that the previously issued audit report cannot be supported in light of the
omitted procedures.
d.
Issue a disclaimer of opinion.
b
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Consideration of Omitted Procedures Discovered after the Report Date
154. Which of the following procedurea is not performed as part of an engagement quality review?
a.
Evaluate judgments about materiality and the disposition of corrected and uncorrected identified
misstatements.
b.
Call each board member to discuss the potential for fraud.
c.
Confirm with the lead audit partner that there are no significant unresolved matters.
d.
Evaluate whether appropriate levels of supervision and reviews of individual audit tasks were
completed adequately during the audit.
b
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Performing an Engagement Quality Review
155. Which of the following is explicitly required by the Sarbanes-Oxley Act of 2002 for audits of public
companies?
Chapter 14 – Activities Required in Completing a Quality Audit
a.
Subsequent event review.
b.
Engagement quality review.
c.
Disclosure of all contingent liabilities.
d.
Seven year client rotation.
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Performing an Engagement Quality Review
156. The partner performing an engagement quality review will review the working papers and financial
statements but will not perform which of the following?
a.
Assess completeness of the audit work and sufficiency of the evidence.
b.
Determine the adequacy of financial statement disclosures.
c.
Raise questions about the reasonableness of various financial statement presentations.
d.
Perform a substantial portion of the audit procedures as an additional check.
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Performing an Engagement Quality Review
157. An additional partner review of the audit and its findings is typically performed by an experienced member
of the firm. Which of the following individuals is most qualified to perform this concurring partner review?
a.
The engagement partner who has worked on the client for three years.
b.
An employee of the enforcement division of the SEC.
c.
An experienced partner of the firm who did not actively participate on the audit.
d.
A partner of another firm or office who knows the client well and who was a vital member of the
audit team.
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Performing an Engagement Quality Review
158. Which of the following is not a typical communication between the auditor and the audit committee?
a.
The auditor should clearly communicate the auditor’s responsibility under Generally Accepted
Auditing Standards (GAAS).
b.
The auditor should clearly communicate the planned scope of the audit engagement with the audit
Chapter 14 – Activities Required in Completing a Quality Audit
committee and discuss its adequacy.
c.
The auditor and management should discuss issues related to the retention of both client staff and
audit firm staff during the period of audit.
d.
All major accounting disagreements with management, even if eventually resolved, should be
discussed with the audit committee.
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Responsibilities of External Auditors to Communicate with the Audit Committee
159. If the audit team encounters difficulties in performing an audit, who should the audit team communicate
these matters to?
a.
The SEC.
b.
The audit committee.
c.
Management.
d.
The PCAOB.
b
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Responsibilities of External Auditors to Communicate with the Audit Committee
160. Which of the following is not a required communication with the audit committee?
a.
Auditor’s responsibility under GAAS.
b.
Analytical review.
c.
Audit adjustments.
d.
Uncorrected misstatements.
b
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Responsibilities of External Auditors to Communicate with the Audit Committee
161. Which of the following is not a required communication with the audit committee?
a.
Accounting policies.
b.
Accounting estimates.
c.
Economic trends.
d.
Difficulties encountered.
Chapter 14 – Activities Required in Completing a Quality Audit
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Responsibilities of External Auditors to Communicate with the Audit Committee
162. What is the letter called that is drafted by the auditor and reports observations to management which may
help management perform more effectively?
a.
The letter of reportable conditions.
b.
The management representation letter.
c.
The management letter.
d.
The contingent events document.
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Communicating with Management via the Management Letter
163. Which of the following is false regarding the management letter?
a.
The management letter is not required
b.
The management letter is the same as the management representation letter.
c.
The management letter helps to provide management comfort that the auditor has done a quality job.
d.
The management letter helps provide management with information that the auditor knows and
understands the client’s business.
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Communicating with Management via the Management Letter
164. Where would the auditor make mention of issues noted during audit procedures that are not of audit
significance?
a.
Engagement letter.
b.
Management letter.
c.
Representation letter.
d.
Attorney letter.
165. Client continuance-related risks do not include which of the following key type of risk?
a.
Client entity characteristics.
b.
Quantitative risk factors.
c.
Entity organizational or governance risks.
d.
All of these are key types of client continuance-related risks.
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Client Continuance Decisions
166. Which of the following statements is false regarding partner rotation and audit firm rotation?
a.
During a cooling off period, the individual or audit firm may not engage in any meaningful audit-
related interactions with the client.
b.
Rules are the same internationally regarding the terms of mandatory partner rotation and mandatory
audit firm rotation.
c.
The issue associated with mandatory partner or audit firm rotation is the familiarity threat.
d.
Having a longstanding relationship with the client could aid audit quality because of the knowledge
that the partner and members of the engagement team gain through time.
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Partner Rotation and Audit Firm Rotation
167. Adjustments
In your audit of Lomar Company for the calendar year 2014, you find a number of items that you believe
represent possible adjustments to the company’s books. Management does not want to make any adjustments.
REQUIRED:
Assuming that Lomar is a public company describe how the adjustments might impact your audit report on
internal control over financial reporting.
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Communicating with Management via the Management Letter
168. Contingent liabilities
The auditor will discuss contingencies with the appropriate executives and management of the company.
Identify at least five sources of evidence to corroborate management’s representations regarding contingencies.
169. Contingencies
Define what a contingency is, describe the auditor’s main concerns about them, and indicate how contingencies
should be dealt with by management and the auditor. Besides litigation, claims and assessments, what are some
other types of contingencies?
170. Litigation, claims, and assessments
Discuss the information management should provide related to litigation, claims and assessments. Also describe
the purpose of the letter of audit inquiry, who writes it, who it is addressed to, and the important inquiries that
are made of the client’s lawyer in the letter of audit inquiry.
171. Management responsibilities
Explain how management explicitly asserts their confidence and responsibility over the financial statements of
the company.
172. Disclosures
You are a staff auditor on the audit of Cosmo Technologies, Inc. The audit partner asks you to carefully read the
new mortgage contract with the Hometown Bank and abstract all pertinent information that might be needed for
a financial disclosure.
Required:
(1) List the information in a mortgage that is likely to be relevant to the auditor.
(2) What are the pros and cons of using a disclosure checklist for this task?
173. Final Analytical Procedures and Disclosures
When auditing Global Alliance Industries, Inc., the auditor performed extensive analytical procedures and
Chapter 14 – Activities Required in Completing a Quality Audit
found the following:
(a) The commission expenses as a percentage of sales has stayed constant for several years, but has increased
significantly in the current year. However, commission rates have not changed.
(b) The rate of inventory turnover has steadily decreased for the past four years.
(c) The inventory as a percentage of current assets has steadily increased for the past four years.
(d) The number of days’ sales in accounts receivable has steadily increased for three years.
(e) The allowance for uncollectible accounts as a percentage of accounts receivable has steadily decreased for
three years.
(f) The absolute amounts of depreciation expense and depreciation expense as a percentage of gross fixed assets
are significantly smaller than in the preceding year.
REQUIRED:
(1) Evaluate the significance of not disclosing or adjusting these items, if material, in the fair presentation of
financial statements.
(2) When assessing disclosures, what criteria do auditors use?
174. Analytical procedures
What is the purpose of using analytical review procedures in the final review stages of the audit?
175. Management representation letters
Describe the purpose of the management representation letter.
176. Management representation letters
Barrett Jennings, CPA, has prepared a letter of representation for the president and controller to sign. The
following items are contained in it:
(a) Inventory is fairly stated at the lower of cost or market and includes no obsolete items.
(b) All actual and contingent liabilities are properly included in the financial statements.
(c) All subsequent events, relevant to the financial statements, have been disclosed.
Required:
(1) Why is it desirable to have a letter of management representation letter from the client concerning these
matters when the evidence accumulated during the course of the audit is meant to verify the same information?
(2) How is the letter of management representation useful as audit evidence?
(3) What are several other types of information commonly included in the management representation letter?
Chapter 14 – Activities Required in Completing a Quality Audit
177. Subsequent events
What are the two types of subsequent events identified in the accounting literature and what is required when
each occurs? Provide an example of each type of subsequent event.
178. Testing subsequent events
List the audit procedures to be performed to determine if subsequent events have occurred and have been
appropriately addressed.
179. Type I subsequent events
Provide two examples of a Type I subsequent event and explain how these events would be treated in the
financial statements.
180. Type II subsequent events
Provide two examples of a Type II subsequent event and explain how these events would be treated in the
financial statements.
181. Dual-dating opinions
Describe the concept and the purpose of dual-dating an audit report.
182. Engagement Quality Review
Morgan Thompson, CPA is a partner in a medium-sized CPA firm and takes an active part in the conduct of
every audit she supervises. She follows the practice of reviewing all audit files of staff auditors on her team as
soon as it is convenient, rather than waiting until the end of the audit. When the audit is nearly finished,
Thompson reviews the audit files again to make sure that she has not missed anything significant. Because she
makes most of the major decisions on the audit, there is rarely anything that requires further investigation.
When she completes the review, she prepares a draft of the financial statements, gets them approved by
management, and has them assembled in her firm’s office. No other partner reviews the audit documentation,
because Thompson is responsible for signing the audit reports.
REQUIRED:
(1) Evaluate the practice of not having a concurring partner review of the audit documentation by another
partner in the firm, (2) explain some of the procedures the reviewer should perform as part of the review
process, and (3) what documentation should be included.
183. Management letters to clients
What is a management letter and how does it differ from a management representation letter?
184. Client Acceptance
Newburg Company is in an industry in the early development stage, where there are minimal barriers to entry to
the client’s business model. Newburg Company’s audit committee decided to put their 2014 audit out for bids.
One of the Big Four CPA firms had performed their audits from 2011-2013, and although happy with the
Chapter 14 – Activities Required in Completing a Quality Audit
previous auditor, the audit committee believed they should rotate to another firm. On the last audit, the Big
Four’s audit fees were $500,000. Barnaby, CPAs, came in as the low bidder, making a proposal to Newburg
Company regarding audit fees for 2014. Their proposed audit fee was $250,000.
Required:
(1) Based on this scenario, describe the ethical decisions that an auditor must make during portfolio
management decisions such as the client acceptance and client continuance decision. What is the relationship
between ethics and high audit quality?
(2) What issues should the client’s audit committee consider before going with the lowest bid?