Question 1

When the proper disclosure in the financial statements of material contingencies is through footnotes, the footnote should describe the nature of the contingency to the extent it is known and

Accepted Answer

A)  the auditor's opinion as to the expected outcome. 
B)  the opinion of legal counsel or management as to the expected outcome. 
C)  an estimate of the amount or a statement that the amount cannot be estimated. 
D)  the steps the client has taken to ensure that it doesn't recur.

Question 2

IFRS uses specific terminology to refer to the likelihood of the occurrence of an organizational event. Which of the following would require note disclosure in the financial statements adjusted?

Accepted Answer

A)  likely to occur and the amount can be estimated 
B)  possible that an outflow of resources is not required 
C)  likelihood is remote 
D)  amount is yet to be confirmed

Question 3

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

Accepted Answer

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.

Question 4

If a lawyer refuses to provide the auditor with information that is within the lawyer's jurisdiction and may directly affect the fair presentation of financial statements about material existing lawsuits (asserted claims) or unasserted claims, the audit report would have to be

Accepted Answer

A)  an adverse opinion. 
B)  a qualified opinion. 
C)  an unqualified opinion with an explanatory paragraph. 
D)  modified to reflect the lack of available evidence (i.e., scope limitation).

Question 5

The standard letter of confirmation sent to the client's legal counsel should be prepared on

Accepted Answer

A)  the auditor's stationery and signed by an audit partner. 
B)  the lawyer's stationery and signed by the lawyer. 
C)  the client's stationery and signed by a company official. 
D)  plain paper and be unsigned.

Question 6

What situation represents a contingent liability for a company?

Accepted Answer

A)  A candy company's monthly production requires 1000 kg of chocolate. The company entered into a contract with a chocolate producer to purchase 6000 kg of chocolate over the next six months at the market price. 
B)  A bike company learned that a racer using its bike was seriously injured in an accident on December 30th, 2015, as the front wheel of the bike was released as the result of a manufacturing defect. The company had not received a claim at December 31st, 2015, but management expects to receive a claim. 
C)  A restaurant received a $10 000 claim from a customer for emotional damages as a result of poor service. The legal counsel of the restaurant indicated that the claim was not supported and there was less than a 5% chance that the restaurant would have to pay. 
D)  A hotel chain was found guilty by a judge for not refunding customers who had online reservations. The hotel chain will have to pay $50 000 to various customers in the following year.

Question 7

The audit procedures for the subsequent events review can be divided into two categories: 1) procedures normally integrated as a part of the verification of year-end account balances, and 2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures would be in the first category?

Accepted Answer

A)  Make inquiries of client regarding contingent liabilities. 
B)  Obtain a letter of representation written by client. 
C)  Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate. 
D)  Review the minute book to determine the existence of any transaction related to year 1.

Question 8

The management letter

Accepted Answer

A)  is required by CAS whenever there are "reportable conditions." 
B)  must follow the format prescribed by the CPA. 
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.

Question 9

The auditor has sent inquiry letters to all of the client's law firms. Two law firms stated that the client was unlikely to win the lawsuits in question, whereas the client had said the opposite. What action should the auditor take?

Accepted Answer

A)  Ask management for invoices supporting the omitted lawsuits. 
B)  Request a meeting with management and the respective law firms. 
C)  Ask the law firms to provide additional details with respect to the lawsuits. 
D)  Change control risk to maximum and increase substantive testing.

Question 10

As part of the review for subsequent events, the auditor will review financial statements prepared after the balance sheet date. The purpose of this review is to examine changes after year end and to look for

Accepted Answer

A)  errors in capital versus maintenance charge allocations that occurred after the year end. 
B)  subsequent payments to accounts payable and long term debt. 
C)  subsequent receipts in accounts receivable, especially for the larger customers. 
D)  changes in the business relative to results for the same period in the year under audit.

Question 11

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which of these subsequent events might result in adjustment of the December 31 financial statements?

Accepted Answer

A)  adoption of accelerated depreciation methods 
B)  write-off of a substantial portion of inventory as obsolete 
C)  collection of 90% of the accounts receivable existing at December 31 
D)  sale of a major subsidiary

Question 12

The standard letter of confirmation from a client's legal counsel should ask for information about the period of time

Accepted Answer

A)  covered by the client's financial statements. 
B)  covered by the client's financial statements plus the preceding year. 
C)  covered by the client's financial statements plus the succeeding year. 
D)  approximately up to the date of the auditor's report.

Question 13

You sent a legal letter to a lawyer who had invoiced your client. The lawyer replied that "his practice consists of conducting real estate closings, and so he could not respond to the letter." What impact does this have on the financial statement audit?

Accepted Answer

A)  There is no impact upon the financial statement audit. 
B)  The audit opinion will need to be qualified. 
C)  The auditor will need to provide a denial of opinion. 
D)  Additional information is needed by reference to legal invoices from this lawyer.

Question 14

The primary objective of analytical procedures used in the final review stage of an audit is to

Accepted Answer

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 operations.

Question 15

State three types of information that should be included in a standard letter of inquiry of a client's law firms.

Accepted Answer

The answer of State three types of information that should...

Question 16

Discuss the purpose of a management letter.

Accepted Answer

The answer of Discuss the purpose of a management letter....

Question 17

IFRS uses specific terminology to refer to the likelihood of the occurrence of an organizational event. Which of the following would need to provide for the (i.e. the financial statements adjusted)?

Accepted Answer

A)  outflow of resources is required, but cannot be reliably estimated 
B)  possibility that an outflow of resources is required 
C)  likelihood is remote 
D)  amount is yet to be confirmed

Question 18

Describe the items the auditor is required to report to the audit committee.

Accepted Answer

The answer of Describe the items the auditor is required...

Question 19

Which of the following is a required condition for a contingent liability to exist?

Accepted Answer

A)  There is a potential liability to an employee of the client. 
B)  The amount of the future payment is known. 
C)  The liability resulted from known events. 
D)  The outcome has been resolved by a current event.

Question 20

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,

Accepted Answer

A)  entries should be proposed to the client to correct the statements. 
B)  no entries need to 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.

Exam 18: Completing the Audit