Chapter 11

LO 11-1

100

Which of the following best describes the role of analytical procedures in the review stages of the audit engagement? a) To identify possible deficiencies in the client's internal control over financial reporting b) To identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures c) to gather evidence to support one or more assertions related to the account balance or class of transactions d) To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement

d) Performing analytical procedures in the review stages of the audit provides the auditors an overall review of the financial statements and allows auditors to assess the adequacy of evidence gathered during the audit.

200

Which of the following is ordinarily performed last in the audit examination? (For 400 points, put these in the correct order) a) Securing a signed engagement letter from the client b) Performing tests of controls c) Performing a review for subsequent events d) Obtaining a signed written representation

c) Written representations would be obtained on the date of the auditors’ report. Correct order: A, B, C, D

300

Which of the following normally occurs earliest in the audit examination? a) Discovery of an omitted audit procedure b) Dual dating the auditors' report on teh entity's financial statements for subsequent events that exist at the date of the financial statements c) Preparation of the management letter d) Review of audit documentation

d) The review of audit documentation occurs after the date of the financial statements but before the date of the auditors’ report.

400

WILD CARD: What feature-length film won the 2014 Oscar for Best Picture? Bonus of 200 points also awarded for naming an actor or actress who won a leading or supporting Oscar for the film.

12 years a slave, featuring Best Supporting Actress Lupita Nyong'o

500

DAILY DOUBLE: answer the following correctly for 1000 points: Identify the four primary time periods in an audit examination. Name an activity that occurs in two of these time periods

Beginning of Year (Interim Testing)--tests of controls; substantive procedures Year-End (date of financial statements) -- attorney's letters, written reps, going-concern assessment, adj. journal entries, audit doc. review, subsequent events Date of Auditors' report (completion date) -- subsequently discovered facts Audit Report Release Date--subsequently discovered, omitted audit procedures, management letter, communications with those charged with governance

LO 11-2

100

Which of these substantive procedures is NOT used to obtain evidence about contingencies? a) Scanning expense accounts for credit entries b) Obtaining a letter from the client's attorney c) Reading the minutes of the BOD meetings d) Examining terms of sale in sales contracts

a) Scanning expenses is unlikely to reveal any information about a contingency

200

Which of the following statements is most likely to be included in an attorney letter? a) "Certain representations in this letter are described as being limited to matters that are material" b) "If any unasserted claims or assessments are omitted from this disclosure, please provide this information directly to our auditors" c) "Our work enabled us to notice some actions that could enhance the profitability of the Company" d) "Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information"

d) The attorney letter would request that the attorney furnish this information to auditors.

300

A charge following the date of the financial statements to a notes receivable account from the cash disbursements journal should alert auditors to the possibility that a a) contingent asset has come into existence following the date of the financial statements b) contingent liability has come into existence following the date of the financial statements c) provision for contingencies is required d) contingent liability has become a real liability has been settled

d) The entry may represent the establishment of a receivable from a party for whom the client has guaranteed a debt. The payment of the debt upon default of the party would be recognized in the accounts by a debit to a notes receivable account and a credit to Cash.

400

The primary reason auditors request responses to attorney letters is to provide auditors a) the probably outcome of asserted claims and pending or threatened claims b) corroboration of the information furnished by management about litigation, claims, and assessments c) The attorney's opinions of the client's historical experiences in recent similar litigation d) A description and evaluation of litigation, claims, and assessments that exited at the date of the financial statements

b) The attorney letter requests the attorneys to corroborate information furnished from management.

500

The scope of an audit is not restricted when an attorney letter limits the response to a) matters to which the attorney has given substantive attention in the form of legal representation b) an evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity c) the attorney's opinion of the entity's historical experience in similar litigation d) probable outcome of asserted claims and pending or threatened litigation

a) The attorneys’ response should be limited to matters to which they have given substantive attention.

LO 11-3 to 11-5

100

A major objective of written representations is to: a) Shift responsibility for financial statements from management to auditors b) Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform c) Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory d) Impress on management its ultimate responsibility for the financial statements and disclosures

d) This responsibility is explicitly included in the written representations.

200

Which of the following statements is not true with respect to written representations a) The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion b) They should address management's responsibility for designing internal control to prevent and detect fraud c) Auditors use them to corroborate information received during the audit from the client and its employees d) They are dated the same date as the auditors' reports

a) The failure of management to furnish representations would result in either a qualified opinion (not an adverse opinion) or a disclaimer of opinion.

300

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on Feb 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated: a) Feb. 13, Y2 b) Feb. 17, Y2 c) March 24, Y2 d) March 28, Y2

c) Written representations are dated as of the date of the auditors’ report (in this case, March 24, Year 2).

400

Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events? 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 confirmation requests c) Communicate material weaknesses in internal control to the client's audit committee d) Review the cutoff bank statements for several months after the date of the financial statements

a) Comparing interim financial statements with the financial statements being audited would identify potential subsequent events.

500

Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? a) Recompute a sample of large-dollar transactions occurring after the date of the financial statements for arithmetic accuracy b) Investigate changes in shareholders' equity occurring after the date of the financial statements c) Send confirmations to vendors with whom the client normally does business but for which no balance in accounts payable is noted d) Confirm bank accounts established after the date of the financial statements

b) This procedure may provide information about sales and repurchases of the entity’s stock.

LO 11-5

100

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? a) Sale of an issue of new tock for $500,000 on Jan 30 b) Settlement of a damage lawsuit for a customer's injury sustained Feb 15 for $10,000 c) Settlement of litigation in Feb for $100,000 that had been estimated at $12,000 in the December 31 financial statements d) Storm damage of $1 Million to the entity's buildings on March 1

c) Because an estimate had been made as of December 31, the event giving rise to the lawsuit had occurred, and the settlement introduced new information about the actual amount of the liability at December 31.

200

A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended Dec. 31, 2012. She completed gathering sufficient appropriate evidence on Jan 30 and later learned of a stock split voted by teh BOD on Feb 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the entity's financial statements. Which is the proper form? a) Dec. 31, 2012, except as to Note X, dated Jan 30, 2013 b) Jan 30, 2013, except as to Note X, dated Feb 5, 2013 c) Dec. 31, 2013, except as to Note X, dated Feb 5, 2013 d) Feb 5, 2013, except for the date of the auditors' report, for which the date is Jan 30, 2013

b) The report date is the audit completion date and the dual date is the date related to the specific event.

300

Auditors have a responsibility related to management's disclosure of new information related to subsequent events until a) the date the fieldwork began b) the date of the auditors' report c) the audit report release date d) the date interim audit work was complete

c) Auditors are responsible for ensuring that management properly discloses all information related to subsequent events that are known prior to the audit report release date.

400

The auditing standards regarding subsequently discovered facts refers to knowledge obtained after a) the date the fieldwork began b) the date of an auditors' report c) The date of the financial statements d) The date interim work was comlete

b) Subsequently discovered facts are identified after the date of the auditors’ report.

500

Ambrose is auditing the financial statements of Mayse (dated Dec. 31, 2012). The date of the auditors' report is February 17, 2013, and the audit report release date is Feb 20, 2013. For which of the following matters would Ambrose have the lease responsibility a) The obsolescence of inventory held on Dec. 31, 2012 that was ID'ed on Jan 20, 2013 b) A customer's deteriorating financial condition that was identified on Feb 19, 2013 c) A merger that was announced by Mays and known by Ambrose on Feb 12, 2013 d) A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2013

d) Because this event occurred following the release of Ambrose’s report, he would not have responsibility for this event because it relates to the 2013 audit.

LO 11-6

100

Which of the following is not required by generally accepted auditing standards? a) Written representations b) Attorney letter c) Management letter d) Engagement letter

c) Management letters, while helpful, are not required under generally accepted auditing standards.

200

After the audit report release date, the auditors determine that an important auditing procedure was eliminated. Which of the following initial courses of action is most appropriate? a) Perform the omitted procedure or an alternative procedure b) Notify the BOD adn regulatory agencies that are currently relying on auditors' reports c) Determine whether the omitted procedure is important in supporting the auditors' opinion on teh entity's financial statements d) Engage another public accounting firm to conduct a quality assurance review

c) This is the initial course of action that would be taken upon the discovery of an omitted audit procedure.

300

WILD CARD What classroom number appears as a code in many Pixar and other animated films, as a nod from the animators to the classroom where they learned basics of animation at the same college in California?

A113

400

Which of these persons generally does NOT participate in writing the management letter a) client's outside attorneys b) client's accounting and production managers c) public accounting firm's audit team on the engagement d) public accounting firm's consulting and tax experts

a) The client’s attorneys would not ordinarily participate in drafting the management letter because this letter concerns helpful suggestions to increase the effectiveness and efficiency of the client’s operations.

500

WILD CARD What is a baby's pacifier referred to as in British terminology?

a Dummy