Auditing Chapter 14 Homework

Question

Which of the following is one of the most important drivers of audit quality in cases where an auditor may feel some pressure to acquiesce to management’s demands to not require that misstatements be corrected in order to preserve a harmonious working relationship?

Answer 1

a. Annual income of the CPA firm.

Answer 2

b. Firm culture.

Answer 3

c. Ethics training.

Answer 4

d. PCAOB guidance.

Answer 5

a. Yielding to management’s demands in order to promote additional service engagements.

Answer 6

b. Emphasizing long-term reputation over the immediate satisfaction of client preferences.

Answer 7

c. Taking sufficient time to deal with difficult client issues.

Answer 8

d. Encouraging auditors to seek consultation with other members of the audit firm.

Answer 9

a. Rollover.

Answer 10

c. Percentage.

Answer 11

d. Iron curtain.

Answer 12

a. The application of the rollover method.

Answer 13

b. Sequential application of both the rollover and iron curtain methods.

Answer 14

c. Simultaneous application of both the rollover and iron curtain methods.

Answer 15

d. The application of the iron curtain method.

Answer 16

a. Accounts receivable confirmations.

Answer 17

b. Documentation of communication with internal and external legal counsel of the client.

Answer 18

c. Documentation of contingent liabilities contained in corporate minutes, correspondence from governmental agencies, and bank confirmations.

Answer 19

d. Information about major contracts in which contingencies may be present.

Answer 20

a. A letter of audit inquiry.

Answer 21

b. A management representation letter.

Answer 22

c. A loss reserve confirmation.

Answer 23

d. A management letter.

Answer 24

a. A violation of the attorney-client privilege.

Answer 25

b. A departure from GAAP.

Answer 26

c. A contingent liability.

Answer 27

d. A scope limitation.

Answer 28

a. Assessing whether accrual or disclosure by the client was reported in accordance with GAAP.

Answer 29

b. Discussing the matter with the client and their insurance adjuster.

Answer 30

c. Confirming with the harmed party regarding the amount that will be claimed.

Answer 31

d. Sending a letter to the client's attorneys for more information.

Answer 32

a. Information on the compliance of the disclosures with GAAP.

Answer 33

b. Information on any limitations on the lawyer’s response.

Answer 34

c. Information on the completeness of management’s list.

Answer 35

d. Information on the likelihood and range of possible losses.

Answer 36

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.

Answer 37

b. 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.

Answer 38

c. Disclosures should be limited to only checklist items.

Answer 39

d. One of the key disclosures is a summary of significant accounting policies used by the company.

Answer 40

a. The disclosures are understandable to users.

Answer 41

b. Disclosed events and transactions have occurred and pertain to the entity.

Answer 42

c. All material and immaterial disclosures have been reported.

Answer 43

d. The information is disclosed accurately and at appropriate amounts.

Answer 44

a. Auditors are not required to consider the applicable legal and regulatory frameworks that apply to the entity.

Answer 45

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.

Answer 46

c. Management may act to conceal noncompliance, or may override controls, or may intentionally misrepresent facts to the auditor.

Answer 47

d. 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.

Answer 48

a. On separate procedures.

Answer 49

b. On the management discussion and analysis (MD&A).

Answer 50

c. On the statement of cash flows for the current period.

Answer 51

d. On information obtained from normal audit procedures performed to test management’s assertions.

Answer 52

a. Issue a qualified opinion.

Answer 53

b. Chart the negative trends as an addendum to the audit report.

Answer 54

c. Identify and assess management's plan to overcome the situation.

Answer 55

d. Increase fees to cover the probable exposure.

Answer 56

a. Loss of the controller to a competitor.

Answer 57

b. Adverse key financial ratios.

Answer 58

c. Large increase to sales in the month previous to year-end.

Answer 59

d. Improper reporting of internal controls by management.

Answer 60

a. Adverse key financial ratios.

Answer 61

b. Employee strike that halts operations for several months.

Answer 62

c. Default on bank debt.

Answer 63

d. Company has not paid dividends to date.

Answer 64

a. Default on a loan.

Answer 65

b. Plan to sell nonessential assets.

Answer 66

c. Negative trends in key financial ratios.

Answer 67

d. Loss of key personnel.

Answer 68

a. To provide the client with a value-added service in conjunction with audit activities.

Answer 69

b. To ask "hard questions" about the company's results and its relationship to external factors.

Answer 70

c. To increase the number of items reported in the management letter.

Answer 71

d. To document planning in accordance with GAAS.

Answer 72

a. A GAAP violation.

Answer 73

b. A contingent event.

Answer 74

c. Improper reporting.

Answer 75

d. Dual dating.

Answer 76

a. 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.

Answer 77

b. Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.

Answer 78

c. Sale of a large block of inventory at a price materially below carrying value.

Answer 79

d. Material change in the amount of settlement of a lawsuit which had been estimated at year end.

Answer 80

a. Resending all bank confirmations returned.

Answer 81

b. Surprise cash count at random locations.

Answer 82

c. Updating the search for unrecorded liabilities.

Answer 83

d. Reading of the minutes of board of directors' meetings.

Answer 84

a. A related-party transaction occurs during the course of the audit.

Answer 85

b. The company initiates an initial public offering subsequent to year-end.

Answer 86

c. The company defaults on its line-of-credit with the bank subsequent to year end but previous to the release of the audit opinion.

Answer 87

d. 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.

Answer 88

a. Reading the board of directors' minutes for all meetings during the year and after year-end through the end of field work.

Answer 89

b. Management inquiry.

Answer 90

c. Reading interim financial statements and comparing them to the audited statements to note significant changes.

Answer 91

d. Partner review of all workpapers.

Answer 92

a. It decreases the possibility of misunderstanding concerning the matters that are the subject of the representations.

Answer 93

b. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.

Answer 94

c. It reminds management of its responsibility for the financial statements.

Answer 95

d. It implies that the auditor is responsible for the design of the internal controls.

Answer 96

a. A scope limitation.

Answer 97

b. A violation of full and fair disclosure.

Answer 98

c. A breakdown in internal controls.

Answer 99

d. A securities law violation.

Answer 100

a. It further acknowledges management's responsibility for the financial statements.

Answer 101

b. It reduces the possibility of misunderstanding concerning the matters that are the subject of the representations.

Answer 102

c. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.

Answer 103

d. It clearly documents the audit procedures that were performed by the auditors.

Answer 104

a. Representation letter.

Answer 105

b. Attorney letter.

Answer 106

c. Management letter.

Answer 107

d. Engagement letter.

Answer 108

a. The SEC.

Answer 109

b. The PCAOB.

Answer 110

c. The audit committee.

Answer 111

d. Management.

Answer 112

a. Analytical review.

Answer 113

b. Audit adjustments.

Answer 114

c. Uncorrected misstatements.

Answer 115

d. Auditor’s responsibility under GAAS.

Answer 116

a. Perform an analytical review.

Answer 117

b. Issue a management letter.

Answer 118

c. Check on a schedule of partner rotation.

Answer 119

d. Estimate client fee for subsequent services to be performed.

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Auditing Chapter 14 Homework

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