Chapter 16 Questions

Analytical procedures are required as a part of the
A. Detailed tests of balances.
B. Internal control assessment.
C. Overall review at the conclusion of the audit.
D. Substantive testing.

C. Overall review at the conclusion of the audit.

The stmt that best expresses the auditor's responsibility w/respect to events occurring btwn the BS date and the end of his audit is:
A. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transaction

D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period

In auditing the BS, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable?
A. Sales and Cost of Goods Sold.
B. Interest and Bad Debt Expense.
C. Sales and Bad Debt Expense.
D. In

C. Sales and Bad Debt Expense.

Auditors should perform audit procedures relating to subsequent events?
A. Through year end.
B. Through issuance of the audit report.
C. Through the last day of field work.
D. For a reasonable period after year end.

C. Through the last day of field work.

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statement

D. Develop an estimate of the total likely misstatement in the financial statements.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors?
A. Miscellaneous revenue.
B. Professional fees.
C. Travel expense.
D. Repairs and maintenance.

C. Travel expense.

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
A. Cash.
B. Accounts receivable.
C. Property, plant and equipment.
D. Intangible assets.

A. Cash.

An example of an internal control weakness is to assign the payroll department the responsibility for:
A. Preparing the payroll expense distribution.
B. Preparing the payroll checks.
C. Authorizing increases in pay.
D. Preparing journal entries for payrol

C. Authorizing increases in pay.

An example of an internal control weakness is to assign the personnel department responsibility for:
A. Distribution of paychecks.
B. Hiring personnel.
C. Authorizing deductions from pay.
D. Interviewing employees for jobs.

A. Distribution of paychecks.

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job?
A. A surprise observation of a paycheck distribution.
B. A test of payroll extensions.
C. Analytical comparisons

A. A surprise observation of a paycheck distribution.

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
A. Obtaining a lawyers' letter.
B. Confirming accounts payable.
C. Reviewing the minutes of board of directors' meetings.
D. Review c

B. Confirming accounts payable.

Which of the following types of matters do not generally require disclosure in the financial statements?
A. General risk contingencies.
B. Commitments.
C. Loss contingencies.
D. Liabilities to related parties.

A. General risk contingencies.

Material loss contingencies should be recorded in the FS if available info indicates it is probable that a loss had been sustained prior to the BS date and the amount of such loss can be reasonably estimated. These considerations will affect the audit rep

D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report.
C. An assessment that loss of the li

B. Qualification of the audit report.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
A. Attempt to determine whether their report is still being relied upon by third parties.
B. Notify regulatory ag

A. Attempt to determine whether their report is still being relied upon by third parties.

Which of the following is not a procedure that auditors typically perform to search for significant events during the subsequent period?
A. Review minutes of board of directors' meeting.
B. Review the latest available interim financial statements.
C. Inqu

D. Review changes in internal control during the period subsequent to the balance sheet date.

Which of the following subsequent events might require an adjustment to the client's financial statements?
A. A business combination with another company.
B. Loss on the sale of a closely-held investment.
C. Loss of plant and equipment due to a fire.
D. R

B. Loss on the sale of a closely-held investment.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
A. Dividends.
B. New debt issuance.
C. New bank accounts.
D. Writeoff of trade accounts receivable.

D. Writeoff of trade accounts receivable.

Which of the following is not a procedure normally performed while completing the audit?
A. Obtain a lawyer's letter.
B. Obtain a representations letter.
C. Perform an overall review using analytical procedures.
D. Obtain confirmation of capital stockhold

D. Obtain confirmation of capital stockholdings from shareholders.

Auditors must communicate internal control "significant deficiencies" to:
A. The audit committee.
B. The shareholders.
C. The SEC.
D. The Federal Trade Commission.

A. The audit committee.

Which of the following procedures is not a procedure that is completed near the end of the engagement?
A. Review cash transactions.
B. Review to identify subsequent events.
C. Obtain the lawyer's letter.
D. Obtain the letter of representations.

A. Review cash transactions.

Which of the following information must be reported on in the auditors' report?
A. FASB-required supplementary information.
B. Other information in client-prepared documents.
C. Information accompanying financial statements in auditor-submitted documents.

C. Information accompanying financial statements in auditor-submitted documents.

In evaluating whether there is a sufficiently low probability of material misstatement in the FS, the auditors accumulate:
A. Likely misstatements in the financial statements.
B. Known misstatements in the financial statements.
C. Known, projected and oth

C. Known, projected and other estimated misstatements in the financial statements.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
A. Extrapolation difference.
B. Known misstatement.
C. Likely misstatement.
D. Projected misstatement.

B. Known misstatement.

The review of audit working papers by the audit partner is normally completed:
A. Prior to year-end.
B. Immediately as each working paper is completed.
C. Near the completion of field work.
D. After issuance of the audit report, but prior to required subs

C. Near the completion of field work.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is:
A. $0
B. $30,000
C. $4

A. $0

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is:
A. $0
B. $30,000
C. $

B. $30,000

An approach that quantifies the total likely misstatement as of the current year end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the:
A. Evalua

D. Rollover approach.

A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's

D. $140,000

An approach that quantifies the total likely misstatement as of the current year end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in t

B. Iron curtain approach.

A client's previous two years financial statements understated estimated warranty payable by $30k and $50k respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60K. In this year's audit $55K r

B. $60,000

One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
A. Weaknesses of a material nature in internal control.
B. Non-compliance with prescribed control procedures.
C. Improper separation of accoun

D. Unusual transactions.

Which of the following is an analytical procedure that should be applied to the income statement?
A. Select sales and expense items and trace amounts to related supporting documents.
B. Ascertain that the net income amount in the statement of cash flows a

D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

It would be appropriate for the payroll accounting department to be responsible for which of the following functions?
A. Approval of employee time records.
B. Maintenance of records of employment, discharges, and pay increases.
C. Preparation of periodic

C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks?
A. Separation of payroll duties is less than adequate for effective internal control.
B. Total payroll costs are a sign

A. Separation of payroll duties is less than adequate for effective internal control.

To minimize the opportunities for fraud, unclaimed cash payroll should be:
A. Deposited in a safe deposit box.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.

C. Deposited in a special bank account.

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
A. Separate the custody of assets from the accounting for those assets.
B. Establish clear lines of authority and responsibility.
C. Separate duties within th

D. Separate the authorization of transactions from the custody of related assets.

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a floo

D. Settlement of litigation in excess of the recorded liability.

With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion

B. Limited to the specific event referred to.

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:
A. Extend auditing procedures.
B. Accept responsibility for year-end adjusting entries.
C. Permit inclusion of a note captioned: ev

A. Extend auditing procedures.

Auditors often request that the audit client send a letter to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
A. An estimate of the dollar amo

D. Corroborative audit evidence.

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.

A. Letter of audit inquiry to the client's lawyer.

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 management representation letter.
D. Testing of the purchasing function.

C. Obtaining a management representation letter.

Which of the following is not correct relating to representation letters?
A. They are ordinarily dated as of the date of the audit report.
B. They are signed by members of top management.
C. They must be obtained for audits.
D. They often serve as a subst

D. They often serve as a substitute for the application of other procedures.

The date the auditor grants the client permission to use the audit report in connection with the FS is the:
A. Last day of significant field work.
B. Report cutoff date.
C. Report release date.
D. Representation date.

C. Report release date.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?
A. "Sufficient audit evidence has been made available to the auditor to permit the i

A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.

To which of the following matters would materiality limits not apply when obtaining written client representations?
A. Violations of state labor regulations.
B. Disclosure of line-of-credit arrangements.
C. Information about related party transactions.
D.

D. Instances of fraud involving management.

The auditors' best course of action with respect to other financial information included in a client prepared annual report containing the auditors' report is to:
A. Indicate in the auditors' report, that the other financial information is unaudited.
B. C

D. Read and consider the manner of presentation of the "other financial information.

In the course of the audit of FS for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary pur

C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.

An auditor will ordinarily examine invoices from lawyers primarily in order to:
A. Substantiate accruals.
B. Assess the legal ramifications of litigation in progress.
C. Estimate the dollar amount of contingent liabilities.
D. Identify possible unasserted

D. Identify possible unasserted litigation, claims and assessments.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.

A. Letter of audit inquiry to the client's lawyer.