41) Discuss three audit procedures commonly used to search for contingent liabilities.
42) State three types of information that should be included in a standard letter of inquiry of
client’s law firms.
43) State the two primary types of subsequent events that require consideration by management
and evaluation by the auditor, and give two examples of each type.
19.2 Provide examples of work completed as part of the final evidence-gathering process
1) The primary objective of analytical procedures used in the final review stage of an audit is to
A) obtain evidence from details tested to corroborate particular assertions.
B) identify areas that represent specific risks relevant to the audit.
C) assist the auditor in looking for potential material misstatements.
D) satisfy doubts when questions arise about a client’s ability to continue in existence.
2) CAS 570 – Going Concern, requires that the auditor evaluates management’s assessment of the
ability of the entity to continue as a going concern based on
A) inquiry with management.
B) the opinion of the legal counsel of the company.
C) the liquidity and solvency ratios of the firm.
D) the evidence collected throughout the audit.
3) 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) representation letter.
C) engagement letter.
D) letters testamentary.
4) Which of the following auditing procedures is ordinarily performed last?
A) Reading of the minutes of the directors’ meetings
B) Confirming accounts payable
C) Obtaining a client representation letter
D) Testing of the purchasing function
5) Refusal by a client to prepare and sign the representation letter would require a(n)
A) qualified opinion as to scope limitation or a disclaimer of opinion.
B) adverse opinion or a denial of opinion.
C) qualified opinion as to accounting treatment departure or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.
6) One of the purposes of a client representation letter is to
A) reduce the amount of audit procedures performed by the auditor.
B) document the responses from management to inquiries about various aspects of the audit.
C) serve as audit evidence for the accuracy of the contingent liabilities.
D) reduce the detection risk.
7) A client representation letter is a written statement from a non-independent source and
therefore
A) cannot be regarded as reliable evidence on its own.
B) can be regarded as reliable evidence only if the auditor finds strong internal controls.
C) can be regarded as reliable evidence if the high-level corporate officials who sign it are
trustworthy.
D) needs to be confirmed by an outside, independent source such as a financial institution, or law
firm.
8) The CAS require the auditor to review the other information in the annual report to ascertain
its consistency with the financial statements. If there is a material inconsistency, the client should
be requested to change the information. If the client refuses, the auditor should
A) issue an adverse opinion.
B) issue a qualified opinion.
C) consider what further action is warranted, including making contact with the audit committee.
D) issue an unqualified opinion, bill the client, and withdraw from any future engagements.
9) In addition to the financial statements, MD&A (management discussion and analysis) are
appended to the financial statements to inform users of management’s expectations for the
foreseeable future, as well as to provide management’s assessment of the financial results.
MD&A is prepared primarily because it is
A) an additional piece of evidence used by auditors to assess the financial statements.
B) generally required by securities regulators in Canada.
C) an unbiased view of the prospective future results of the company.
D) required so that the company can borrow more funds or sell more shares to the public.
10) Klein Corporation has reported a loss for the 6th year in a row. Klein also has a large bank
loan due in the coming year, bringing its current ratio to .60. Further, due to the economic crisis,
Klein had to increase its bad debt expense by 4% and also saw its largest client, Forest Prairie
filing for bankruptcy. Forest Prairie’s purchases made up 18% of the total sales of Klein in the
past year. Forest Prairie also had an unpaid balance to Klein at year end.
In trying to reduce expenses, Klein has reduced the employee training from 5 days to 1 day.
During the year, an employee was seriously injured in the production process when his arm was
caught in a press. The employee has filed a lawsuit against Klein for $1,000,000 as he claims
that he was not properly trained to use the equipment. The legal proceeding for this case should
begin in the next fiscal year. Since Klein has never been involved in such as lawsuit before, the
legal counsel indicated that they were not able to estimate the amount and likelihood that Klein
would have to pay.
Required: Evaluate the going concern situation at Klein and indicate what the auditor would be
required to do under CAS 570.
11) A) Discuss the purposes of performing analytical procedures during the audit completion
phase.
B) State the two purposes of the client representation letter.
12) List four specific matters that should be included in a client representation letter.
13) 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.
19.3 Describe the actions that the auditor takes to evaluate the adequacy of accumulated
evidence
1) An important part of evaluating whether the financial statements are fairly stated is
summarizing the misstatements uncovered in the audit. Whenever the auditor uncovers
misstatements that are in themselves material,
A) entries should be proposed to the client to correct the statements.
B) no entries need be made but footnote disclosure is required.
C) it is necessary to combine individually immaterial misstatements with the material
misstatements and make entries to correct the statements.
D) it is necessary to combine individually immaterial misstatements with the material
misstatements and make full disclosure in the footnotes.
2) There are often a large number of immaterial errors discovered that do not require an
adjustment at the time they are found. How should these errors be dealt with by the auditor?
A) Since these items are individually immaterial, the auditor would not recommend adjusting
entries to client.
B) Since there are a large number of these, the auditor would recommend adjusting entries to the
client.
C) The auditor must combine the individually immaterial errors and evaluate whether the
combined amount is material.
D) The auditor would never combine these individually immaterial amounts because that would
mix apples and oranges.
3) The initial review of the working papers prepared by any given auditor is normally done by
the
A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.
4) When several staff are working together on an audit engagement, what type of quality control
review is conducted on a daily basis?
A) the partner reviews the electronic files
B) team review by interview
C) second partner review
D) manager review of sections
5) CAS 250 requires the auditor to communicate illegal acts to the audit committee
A) if the illegal acts are slightly material.
B) if the illegal acts are material.
C) if the illegal acts are other than trivial.
D) regardless of materiality.
6) State the three main reasons why it is essential that working papers be thoroughly reviewed by
another member of the audit firm at the completion of the audit.
19.4 Describe the communications the auditor is required to send after the completion of the
audit
1) CAS 450 requires the auditor to communicate all misstatements to the audit committee
A) if the misstatements are slightly material.
B) if the misstatements are material.
C) if the misstatements are other than trivial.
D) regardless of materiality.
2) The management letter
A) is required by the CAS whenever there are “reportable conditions.”
B) must follow the format prescribed by the CICA.
C) spells out to the audit committee the auditor’s responsibilities under generally accepted
auditing standards.
D) is optional and is intended to help the client operate its business more effectively.
3) Discuss the purpose of a management letter.
4) Describe the items the auditor is required to report to the audit committee.