L 2 Assess the importance of the Omitteg procedures to the auditor's ability to support hig opinion. Results of otber audit procedures that were applied may compensate for or make the omitted procedures less important. Evaluating such results may involve: * Reviewing the working papers * Discussing the circumstances with the engagement personnel = Reevaluating the scope of the audit. Undertake to apply the omitted procedures or the corresponding alternative procedures. If the auditor determines that the omission of the procedures impairs his current.ability to support his opinion, and the auditor believes that there are persons currently relying, or likely to rely on the report, the auditor should promptly apply the omitted ” procedures or the corresponding alternative procedures If, after applying the omitted procedures, the auditor determines that the financial statements ag materially misstated and that the auditor's report is inappropriate, the auditor should discuss the matter with the management and take steps to preveat. © future reliance on the report. Multiple Choice Questions Subsequent events j 1. a Which of the following is not among the charactetistics of the procedures performed in completing the audit? a. b c. d. They are optional since they have only an indirect impact on the opinion to be expressed. They involve many subjective judgments by the auditor, They are performed after the balance sheet date. They are usually performed by audit managers or other * senior members of the audit team who have extensive audit experience with the client. An auditor has the responsibility to actively search for subsequent events that occur subsequent to the: a. b. c. d. balance sheet date. date of the auditor’s report. balance sheet date, but prior to the audit report. date of the management representation letter. “Subsequent events” for reporting purposes are events which occur subsequent to the Financial statement date. Date of the auditor’s report. Financial statement date but prior to the date of the auditor’s report. nee Date of the auditor’s report and concern contingencies which are not reflected in the financial statements.s When completing the a adie, the auditor performs procedunes Jpned to identify subsequent ev ‘ re ancl stones. Accordingly ‘Those that provide evidence Those that are indicate of abount conditions that __condions that ara existed at period end absent 0 prod end a. Will requite adjustment Will require adjustment b. Will require adjustment Will require disclosure c. Will require disclosure Will require disclosure d. Will require disclosure Will require adjustment . The auditor has completed his assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to: : a. adjust the financial statements for the year under audit. b. disclose in the notes to financial statement the amount of the adjustment. c. duly note in the audit workpapers that next year’s financial statements need to be adjusted. d. make no adjustment of the financial statements for the | year under audit. : : ‘Which of the following procedures should an auditor generally perform regarding subsequent events? 3 a - Compare the latest available interim financial statements — with the financial statements being audited. b. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmatiol — requests, © Communicate material weaknesses in the internal contol | structure to the client’s audit committee. 4 Review the cut-off bank statements for several momtS | after the yearend, ents that may require adjustment | |, Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? a. Recomputing a sample of large-peso transactions occurring after year-end for arithmetic accuracy, b. Investigating changes in stockholders’ equity occurring after year-end. c. ‘Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising after year-end. d. Confirming bank accounts established after year-end. . Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events? a. Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records. b - Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date. ©. Review the treasurer’s monthly reports on temporary investments owned, purchase, and sold. d. Reading minutes of directors and stockholders’ meetings Phil, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to 2 fair presentation of the financial statements in conformity with financial feporting standards. Which one of the following procedures __. Would be least appropriate for this purpose? a. Confirm as of the completion of field work accounts " teceivable which have increased significantly from the year-end date. . b. Read the minutes of the board of directors. © Inquire of management conceming events which may have occurred. ‘ Obtain a lawyer’ letteras of the completion of field work.except a. b. b. c. a. 12 . A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the Decembet | ‘31 financial statements? 3 ‘Reviewing procedures management has established ensure that subsequent events are identified. Reading minutes of the meetings of sharcholders, the board of directors and audit and executive committee _ held after period end and inquiting about matters discussed at meetings for which minutes are not yet available. ‘Testing the effectiveness of those internal control policies and procedures that may have significantly changed in the subsequent period. Inquiring or extending previous oral or written inquixes, | of the entity’s lawyers concerning litigation and claims sale of a major subsidiary adoption of accelerated depreciation methods ‘wsite-off of a substantial portion of inventory as obsolete collection of the accounts receivable existing at Decembet Serleatf ston in cee ofthe econded Hab 13. Which of the following events in the subsequent period will requite disclosure in the notes to financial statements? realization of recorded year-end receivables at a different amount than recorded settlement of recorded year-end estimated product warranty liabilities at a different amount than recorded purchase of a machine purchase of a business A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should b. c d. to ‘a Advise management to disclose the event in notes to the financial statements. Disclose the event in the auditor’s report. Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known. Advise management to adjust the financial statements. Which of the following subsequent events will be least likely result in an adjustment to the finaincial statements? Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date. Culmination of events affecting the realization of inventories owned as of the balance sheet date. Material changes in the settlement of liabilities which Were estimated as of the balance sheet date. Material changes in the quoted market prices of listed investment securities since the balance shect date.16. 18. 19. Whenever subsequent even © eer he taken to dices, ee ie the conements care must be taken t0 distin bemween conditions that existed at the balance sheet dea those that come into being after the end of the year. Th, ‘ion should not be incorporated di subsequent informa srthe conditions causing the chaage into the statements valuation: took place before year-end. did not take place until after year-end. occurred both before and after year-end. are reimbursable through insurance policies. aoe ‘An auditor completed fieldwork on February 10, 2019 fora December 31, 2018 year-end client. A significant subsequent event occutred on February 22, 2019. In this case, which of the following report dates would not be appropriate? a. February 10, 2019 b. February 10, except Note 1, February 22, 2019. c. February 22, 2 id. December 31, 2018 The practice of dual dating is associated with: a, subsequent events between the balance sheet date and the ‘report date. b. subsequent events between the balance sheet date the issuance of the report. ©. subsequent events between the report date and issuance of the ‘report. d. the discovery of omitted procedures. If an auditor dates the auditor’s report on financial statemeay for the year ended December 31, 2018, as of February | 2019, except for Note 5, as to which the date is March 3. 22, c, all subsequent events-occurting through February 10, 2019, and the specific subsequent aoe Seer in Note 5 through March 3, 2019 ‘ d. only the specific subsequent event referred to in Note 5 through March 3, 2019 20, The practice of dual dating applies to a. all types of subsequent events b. subsequent events that requite disclosure cc. subsequent events that occur before the date of the auditor's tt a. eequenr events that occur after the financial statements ate issued 21. An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to: a. extend appropriate audit procedures. b. assume responsibility for events after the date of the auditor’s report. ©. assume responsibility for event from fiscal year end to the date of the audit report. : 4. roll the dice and hope for a successful outcome. An auditor issued an audit report that was dual dated for a Subsequent event that occurred after the completion of field work but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of field work was 2. Limited to the specific event referenced‘ : Limited to include only events occurring before the date Of the last subsequent event referenced S _ Extended to subsequent events occurring through the date of issuance of the report Extended to include all events occurring since the completion of field work oa wing procedures would an a0 likely = Maina "BP yence about 20 entity’s subsequer events? ath after the blag ile bank activity for the month a 7 ee sa cash activity feflected in the ac records 7 deel & eter from the entity's attorney describing any * ee baton, “anasserted claims, or loss cont c. Review the treasurer's monthly reports on pa * Gwestments owned, purchased, and sold 4. Examine on a test basis the purchase invoices ang Litigation, claims and assessments 24, The primary source of information about litigation, claims and assessments is obtained by auditors from the: a. client's lawyers b. client's management c. dlient’s previous auditor d. all of the above 25. When obtaining evidence regarding litigation against a cli the CPA would be least interested in determining a. _An estimate of when the matter will be resolved b. The period in which the underlying cause of the lit occurred ¢. The probability of an unfavorable outcome d. An estimate of the potential loss * 26. The auditor's primary means of obtaining corroboratio® management’ information concerning litigation is @ a. — Letter of audit inquiry to the client’s lawyer b. Letter of corroboration from lhims and assessments from a Of the cour presiding over the Wigaton 28. x 0. , An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against 2 client except the “a. Period in which the underlying cause for legal action occurred b. Probability of an unfavorable outcome c. Jurisdiction in which the matter will be resolved 4. Existence of a situation indicating an uncertainty as to the possible loss : Ifa potential loss on a contingent liability is remote, the liability usually is: a. disclosed in the notes, but not accrued. b, neither accrued nor disclosed in notes. ¢. accrued and indicated in the body of the financial statements. : d. disclosed in the auditor’s report but not disclosed on the financial statements. . An auditor will ordinarily examine invoices from lawyers primarily in order to a. Substantiate accruals b. "Assess the legal ramifications of litigation in progress ©. Estimate the peso amount of contingent liabilities 4. Identify possible unasserted litigation, claims, and assessmerits : If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should 3. Honor the confidentiality of the client-lawyer relationship Consider the refusal to be a scope limitation 4 Seek to obtain the corroborating information from management Disclose this fact in a footnote to the financial statements31. 32. “The primary reason an auditor requ of ing sent co a elents attorneys is to provide the auditor with A Totion and evaluation of litigation, claims, ang aA desesption Poxcted atthe date of the balance sheet An eapert opinion as fo whether a loss is possible, probable, or remote c. The, opportunity concerning liigatio d. Corroboration of to examine the documentation 2, claims, and assessments f the information furnished by management concerning litigation, claims, and assessments The refusal of a client’ attorney to provide a representation on the legality of a particular act committed by the client is generally a. Sufficient reason to issue b. Considered to be a scope limitation c. Insufficient reason to modify the auditor's report because” of the attorney's obligation of confidentiality d. Proper grounds to withilraw from the engagement without further consideration. Management Written Representations xs. 34. 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. letter of inquiry. c. letters testamentary. d. written management representation. Which of the following statements about a write _ representation is not correct? a. Itis optional. b. tis addressed to the auditor c. Itconfirms onl i i : & oral tepresentation made by management «_ It’s date normally coincides wi dit pide Wy coincides with the date of the quests letters of inguity be 35. a b. Which of the following is not a reason why the auditor requests that the client provide a written representation? Professional auditing standards require the auditor to obtain a written representation. It stresses upon management its responsibility for the preparation and fair presentation of the financial statements. Ie provides written documentation of the oral responses already received to inquities of management. It provides written documentation, which is a higher quality of evidence than management's oral responses to inquiries. 36. Written representation is used by the auditot to Reduce the scope of the auditor’s physical inventory work but not the other inventory audit work that is normally performed. : Confirm in writing the valuation basis used by the client to value the inventory at the lower of cost or market. Lessen the auditor’s responsibility for the fair presentation of balance sheet inventories. Remind management that the primary responsibility for . the overall fairness of the financial statements rests with management and not with the auditor. 37. When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations Complement, but do not replace, substantive tests designed to support the assertion. . Constitute sufficient evidence to support the assertion when considered in combination with a sufficiently low assessed level of control tisk. Are not part of the evidence considered to support the assertion, Replace a low assessed level of control risk as evidence to suppot the assertion. ;38. Which of client's managem + 39. 40. 41. 42. b c 4. A purpose of a management representation letter is to reduce_| a. a. A representation letter issued by a client b. c d. An auditor must obtain written management representatiod that normally should be signed by a aos the following would the auditor expect to find in at representation letter? ' ions for internal management's recommendadio' con ffectiveness improvements 3 snanagements plans for improving product quality managements compliance with contractual arrangemeny that impact the financial statements management’ goals for improving earnings per share ‘Audit risk toan aggregate level of misstatement that be considered material. auditor's respon | to detect m: management's responsibility for the financial statements ‘The scope of an auditor's procedures concerning related party transactions and subsequent events. Is essential for the preparation of the audit program. Is a substitute for testing. Does not reduce the auditor's responsibility. Reduces the auditor’s responsibility only to the extent that itis relied upon. ‘The president and the chairperson of the board. ‘The treasurer and the internal auditor. Chie financial offer ‘ice president of ° Chief executive offices 44g 43. a4, 45, 4 6. ‘The date of the management representation letter shonld coincide with the date of the a. Balance sheet. b, Latest interim financial statements. c, Auditor’ report d. Latest related party fransaction. ‘A client representation letter is: a, Prepared on the CPA’s letterhead. b. Addressed to the client. c. _ Signed by high-level officials (eg, the president and chief financial officer). Dated as of the client's year-end. = Which of the following would the auditor find most useful in relation to its previous audit procedures from the client representation letter? a. to impress upon the audit firm its responsibility for the audit b. to impress upon management its responsibility for the I statement assertions ind management of potential misstatements or omissions in the financial statements d. to document the responses from management to inquiries about vations aspects of the audit Manageinent's refusal to furnish a written representation letter ona matter which the auditor considers essential constitutes 3. Prima facie evidence that the financial statements are not Presented fairly, _ b. An illegal act. . © An uncertainty sufficient to preclude an unmodified opinion, | a 4. A scope limitation sufficient to preclude an unmodified pinion.47. If management refuses to furnish certain w; 48. Which of the following auditing procedures is ordinarily | 49. When an audit is made in accordance with Philippine Standards — representations that the auditor believes are essential, which of the following is appropriate? . a. Theauditor can rely on oral evidence relating to the matty as a basis for an unmodified opinion. b. The client's refusal does not constitute a scope limitation that may lead to a modification of the opinion. c. The client's refusal may have an effect on the auditory ability to rely on other representations of management, 4. The auditor should express an adverse opinion because | of management's refusal. : performed last? a. reading minutes of the board of directors’ meetings b. confirming accounts. payable c. obtaining a client representation letter d. testing the purchasing function on Auditing, the auditor should always a. Document the understanding of the client's internal control and the basis for all conclusions b. About the assessed level of control risk for financsl - statement assertions, ¢. Employ analytical procedures as substantive tests (0 obtain evidence about specific assertions related (® account balances, : d. Obtain written representations from management: . © Observe the taking of physical inventory on the balaat sheet date. Going Concern 50. 52, PSA 570 requires the auditor to-evaluate whether there is a substantial doubt about a client’ ability to continue as a going concern for at least: a. one quarter beyond the balance sheet date. b. one quarter beyond the date of the auditor's report. c. one year beyond the balance shect date. d. one year beyond the date of the auditor's report . Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern? a. review compliance with the terms of debt agreements b. confirmation of accounts receivable from principal customers c. reconciliation of interest expense with debt outstanding d. confirmation of bank balances Which of the following conditions or events most likely would cause an auditor to have significant doubt about an entity’s ability to.continue as a going concern? a. Cash flow from operating activities are negative b. Research and development projects are postponed ©. Significant related party transactions are pervasive 4. Stock dividends replace annual cash dividends . If, on the basis of the additional procedures cattied out and the information obtained, including the effect of mitigating citcumstances, the auditor’s judgment is that the entity will Rot be able to continue as a going concern, the financial Statements should be prepared using an appropriate basis; Otherwise the auditor will issue a(a) 2. disclaimer of opinion b. qualified! opinion © ‘adverse opinion 4. unmodified opinion with emphasis of matter paragraph 45154, Which of the following may not cast significant doubt the going concern assump! mS. a. Which of the following statements is not correct conceming the auditor’ responsibility about management's use of the going concern assumption? a, b. tion of an entity? "The entity heavily used long-term capital in financing gg investment is ‘manent assets The entity fails to meet capital and other statutory requirements : ‘There is a pending legal or regulatory proceeding agains the entity that may, if successful, result in claims that are _| unlikely to be satisfied ‘There was a change in legislation or government policy expected to adversely affect the entity The auditor should evaluate management's assessment of the entity’s ability to continue as a going concern, The auditor should inquire of management as t knowledge of events or conditions beyond the period ‘assessment used by management that may cast significant | doubt on the entity’s ability to continue as a going concern. The auditor does not have a responsibility to design Procedures other than inquiry of management to tests for indication of events or conditions which ¢ significant doubt on the entity’s ability to continue #8 going concern beyond the period assessed by management The absence of any reference to going concer uncertain in the auditor’s report can be viewed as a guarantee 25 the entity’ ability to continue as a going concern. 56. 57. 58, When conditions and events have been identified which may cast significant doubt on the entity's ability to continue as 2 going concern, the auditor should consider performing the following procedutes except a. Review management's plans for future actions based on going concern assessment, b. Gather sufficient appropriate evidence to confirm ot dispel whether or not a material uncertainty exists by carrying out procedures such as considering the effect of management plans and other mitigating factors. c. Seek written reptesentations from management regarding its plans for future actions. 4, Issue a report that contains a disclaimer of opinion. When a question arises about an entity’s continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity’ ‘means for maintaining adequate cash flow. An example of such a factor is the 4. Possibility of purchasing certain assets rather than leasing them b. Capability of extending the due dates of existing debt © Approptiateness of changing depreciation methods from double declining balance to straight ine 4. Marketal of property and equipment that management plans to keep The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue 38 going concern would most likely be mitigated by evidence telating to the % Ability to expand operations into new product lines in the future Feasibility of plans to purchase leased equipment at less than market value Marketability of assets that management plans to sell Committed arrangements to convert preferred stock to long-term debtFR ich of the following auditing procedures most likely wou ee auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to contiggs| jing concern? ' nace = * Sowpecting title documents to verify whether any assey are pledged as collateral — , b. Confirming with third parties the details of arrangemeny to maintain financial support ; c. Reconciling the cash balance pet books with the cutoff _ bank statement and the bank.confirmation 4. Comparing the entity’s depreciation and agi capitalization poli other entities in the ‘industry 59. Which of the following conditions or events most likely would. cause an auditor to have substantial doubt about an entitys ability to continue as a going concern? a. Significant related party transactions are pervasive b. Usual trade credit from suppliers is denied c. Atrearages in preferred stock dividends are paid 4 d. Restrictions on the disposal of principal assets are preseat_ 60. sus iis ats Analytical Procedures ‘The purpose of analjtical procedures at the completion of te audit includes all of the following except j a. Revising the audit plan ae b. Considering overall reasonableness of the financll : statements 4 c. Reviewing adequacy of evidence gathered to investig#® ‘unusual fluctuations ao aid d. Recalculating some of the ratios examined during 9° _ Planning 4 Analytical procedures in the overall review should be: {| a. applied to every item on the financial statements: | b. performed by the partner or manager on the engage | 61. 62. ¢-. based on financial statement data before all 3% adjustments and reclassifications have been 5 4. performed only when material misstatement is 6: 64. 65. 66, Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that control activities ate not operating effectively b. Additional tests of details are required : c. _Irregulitities exist among the relevant account balances d. Communication with the audit committee should be revised Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a satisfactory explanation, the auditor must assume that there is a high probability that an error or irregularity exists. In this case, the auditor must issue either a qualified or an adverse opinion. issue a disclaimer. issue either 2 qualified opinion ot a disclaimer design other appropriate audit procedures to determine if such errors do exists. pore Analytical procedures used in the overall review stage of an audit generally include 2. Considering unusual or unexpected accoiint balances that were not previously identified. b Performing test of transactions to corroborate ‘management's financial statement assertions. % © , Gathering evidence concerning account balances that have not changed from the prior year. 4. Re-testing control procedures that appeared to be ineffective during the assessment of control tisk. If a lawyer refuses to furnish corroborating information "garding litigation, claims, and assessments, the auditor should *. Honor the confidentiality of the client-lawyer telationship b. Consider the refusal to be tantamount toa scope imitation © Seek to obtain the corroborating information from . a panagement me "Disclose this fact in a footnote to the financial statemeiits 455.dit procedures do not enable the. too pateria} and the management refuses to adjug gs | i nota seterents, the auditors report should be moda | 10 ined odifed opinion with emphasis of materpang A disclaimer of opinion 7 ither qualified of disclaimer of opinion Either qualified or adverse opinion b. c a. 68. When the auditor determines that detection risk regardin financial statement assertion for a material account balance! class of transactions cannot be reduced to an acceptable lve, the auditor's report should express a. Either qualified or adverse opinion b. Either qualified or disclaimer of opinion c. An unmodified opinion with emphasis of 2 mat Paragraph d. A negative assurance. Post Audit Responsibility 69. After issuing a report, an auditor has no obligation to continuing inquiries or perform other procedures the audited financial statements, unless a. Information, which existed at the report date and affect the report, comes to the auditor's attention. b. Management of the entity requests the auditot tO the auditor’s report. © Information about an event that occurred after th “of fieldwork comes to the auditor’ Final determinations or res. contingencies Yhat had been disclosed in the statements, 70, Which of the following events occurring after the issuance of m1. 72, an auditor’s report most likely would cause the auditor to make further inguities about the previously issued financial statements? a, A technological development that could affect the entity’ fature ability to continue as a going concern, b, The discovery of information regarding a contingency that existed before the financial statements were issued. c. The entity’ sale of a subsidiary'that accounts for 30% of the entity’s consolidated sales, d.° The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report. When an investigation of the discovery of facts existing at the report date confirms the existence of the fact and the auditér believes the information is important to those relying or likely to rely on the financial statements, the auditor should immediately: Take steps to prevent futute reliance on the audit report. Notify the SEC or other regulatory agency. Resign from the engagement. Take no action since the auditor is not responsible for such matters. Bore Soon after Kyle’s audit teport was issued, Kyle learned of . Cettain related patty transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the financial statements. Kyle should 2. Plan to audit the transactions during the next engagement. b. Recall all copies of the audited financial statements © Determine whether the lack of disclosure would affect the auditor’s report. 4. Ask the client to disclose the transactions in subsequent interim statements.73. Subsequent to the issuance of the auditor's pa, re auditor became aware of facts existing at the report date that woul have affected the report had the auditor then been aware of such facts, After determining that the information is reliable, should next , fy oard of directors that the auditor's report no longer be associated with the financial nts. 1e whether there are persons relying ot likely to the statements who would attach portance to the information. t management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. d, Issue revised pro forma financial statements taking into consideration the newly discovered information. 74, When a CPA has concluded that action should be taken to prevent future reliance on his report he should a. Advise his client to make appropriate disclosure of the newly discovered facts and their impact on the financial statements to persons who are known to be currently relying or who are likely to rely on the financial statements and the related auditor’s report. b. Recall the financial statements and issue revised statements and include an appropriate opinion. c. Advise the client and others not to rely on the financial statements and make appropriate disclosures of the corrections in the statemerits of a subsequent petiod- d. Recall the financial statements and issue a disclaimer of opinion which should generally be followed by revised statements and a qualified opinion. an 75. After an audit report containing an unmodified opinion on a non-public client’s financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should a. Determine whether the information is reliable and if determined to be reliable, request that revised financial statements be issued b. Notify the entity that the auditor’ report may no longer be associated with the financial statements. c. Describe the effect of this subsequently discovered information in a communication with persons known to be relying on the financial statements. d. Take no action because the auditor has no obligation to make any further inquiries. 76, On February 25, a CPA issued an auditor’ report expressing an unmodified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on Februaty 11, the entity incurred 2 material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to 4. Notify the entity’s creditors that the financial statements - and the related auditor’s report should no longer be relied upon b. Notify each member of the entity's board of directors about management’s refusal to ‘adjust the financial . statements ¢. — Issue revised financial statements and distribute them to each creditor known to be relying on the financial Statements 4. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the financial statements71, Which of the following 78. When a contingency is resolv wold be x sobsequet dicorery of ‘ the auditor? te ardor equi # response DY the au ee nae of the inclusion of material nonexistent sales 2 crvecy of the faite to wste off materia obsolete inventory . discovery ofthe omission a weed the value of investments: 1 of a material footnote ed immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor should ae cvne thar the cent issue revised financial statements, b. Inform the audit committee that the report cannot be relied upon. c. Take no action regarding the event. 4. Inform the appropriate authorities that the report cannot be relied upon. 79. After issuing a repost an auditor concludes that an auditing, procedure considered necessary atthe tiie of the examination ‘was omitted from the examination. The auditor should first a, Undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the auditor’s opinion. b. Assess the importance of the omitted procedure to tbe auditor's ability to support the opinion expressed on the _ financial statements taken as a whole. c. Notify the audit committee or the board of director's that the auditor’s opinion can no longer be relied upon 4: Review the results of ees that wre apie to compensate for the one omitted or to make its omission less important. 0. An auditor concludes that the omission of a substantive 81. 82, procedure considered necessary atthe time of the exarnination may impair the auditor's present ability to support the previously expressed opinion, ‘The auditor need not apply the omitted procedure if a, The risk of adverse publicity or litigation is low. of other procedures that were applied tend to for the procedure omitted ‘was qualified because of a departure S, s of the subsequent period's tests of controls make the omitted procedue less important. ‘An auditor concludes that a substantive auc considered necessary during the prior period's audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure? a. There ate no alternative procedutes available to provide the same evidence as the amitted procedure. b. The omission of the procedure impairs the auditor's ity to support the previously expressed opinion. . The source documents needed to perform the omitted procedure are still available. d. The auditor’s opinion on the prior period’s financial statements was unmodified. An auditor concludes that an audit procedure considered necessary at the time of the examination had been omitted. The auditor should assess the importance of the omitted Procedure to’ the ability to support the previously expressed pinion. Which of the following would be least helpful in making that assessment? 2. A discussion with the client about whether there are Persons relying on the auditor's report. ». A reevaluation of the overall scope of the examination. © A discussion of the circumstances with engagement Personnel. 4. A review of the other audit procedures that were applied that might compensate for the one omitted. 46184. 85. If the stockholders are currently relying Clatk should first se to the stockholders that Clark's unmodified op hould not be relied on, b. Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion, c. Reissue the auditor's report and add an explanation paragraph describing the departure from PSA. d. — Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level The auditor is most likely to discover omitted audit procedures during a. preparation of the management letter. b. follow-up procedures performed in compliance’ with generally accepted auditing standards. c. the conference held with the client prior to issuing the audit report. 4. apost engagement review performed as patt of the firm quality control inspection program. Most auditors assess inherent risk as high for related and related-party transactions because 2. Of the accounting disclosure requirement b. Of the lack of independence between the parties It is required by generally accepted accounting PH! 86. principal 8. ial record of the meetings of the board of directors stockholders is contained in the corporate a. Bylaws cc. charter b. Minutes d. license 88. Which of the following is not considered a related party? a. Affiliated companies b. Principal owners of the company ©. Line employees of the company d. Members of company management 89. Related pasties are commonly identified in which of the following ways? a. Review of SEC filings b. Examination of stockholder listings ¢. ° Inquiry of management 4. All of the above 50. An auditor should examine minutes of the board of directors meetings 3. Through the date of the financial statements ‘Through the date of the audit report Only at the beginning of the audit b. c. 4. Ona test (sample) basisChapter 11 © sautes are the official record of the meet 81, The eoepaate re tpectoss and stockholders. The mina pie izations related to which of the : i THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS d. All of the above Auditor's Report on Financial Statements 92, When considering the objectivity of internal auditors, an independent auditor should a. Evaluate the quality control program in effect for the internal auditors b. Examine documentary evidence of the work that they performed | c. Test a sample of the transactions and balances that the — internal auditors examined 4 d. Determine the organizational level to which the internal auditors report a The objective of an audit of financial statements is to enable the auditor to express an opinion about whether the financial statements , in all material respects, in accordance with the racial reporting framework. The preparation of the” ements by management and, where appropriate, those charged with governance requires the inclusion of an adequate esctiption of the applicable financial reporting framework in the fnancial statements. ‘The financial reporting framework provides a Context for the auditor’s evaluation of the fair presentation of the “financial statements, Without this framework, the auditor would Sot have a benchmark for evaluating the faimess of the financial Statements,