Professional Documents
Culture Documents
XI. Completion of Audit
XI. Completion of Audit
___1. The following are the purposes of analytical procedures performed during the overall
review phase of audit, except
a. The conclusions drawn from the results of analytical procedures during overall review are
intended to corroborate conclusions formed during the audit of individual components or
elements of the financial statements.
b. The results of such analytical procedures may identify a previously unrecognized risk of
material misstatement.
c. It assists the auditor to draw reasonable conclusions on which to base the auditor’s opinion.
d. To detect material misstatements in an account balance through reasonable test.
___2. Which of the following is not considered a related party to the client?
a. A person or other entity that has control or significant influence, directly or indirectly through
one or more intermediaries, over the reporting entity
b. Another entity over which the reporting entity has control or significant influence, directly or
indirectly through one or more intermediaries
c. Another entity that is under common control with the reporting entity
d. The venturer in relation to another venturer in a joint venture
___3. It refers to a transaction conducted on such terms and conditions as between a willing buyer
and a willing seller who are unrelated and are acting independently of each other and pursuing their
own best interests.
a. Arm’s length transaction
b. Related party transaction
c. Transaction outside the normal course of business
d. Negotiated transaction
___4. Which of the following statements concerning the nature of related party relationships or
transactions is incorrect?
a. Related parties may operate through an extensive and complex range of relationships and
structures, with a corresponding increase in the complexity of related party transactions.
b. Information systems may be ineffective at identifying or summarizing transactions and
outstanding balances between an entity and its related parties.
c. Related party transactions may not be conducted under normal market terms and conditions;
for example, some related party transactions may be conducted with no exchange of
consideration.
d. Many related party transactions are in the normal course of business. In such circumstances,
they still carry higher risk of material misstatement of the financial statements than similar
transactions with unrelated parties
___5. The following are the objectives of a financial statements auditor when auditing related party
relationship of transaction, except
a. Irrespective of whether the applicable financial reporting framework establishes related party
requirements, to obtain an understanding of related party relationships and transactions.
b. To recognize fraud risk factors, if any, arising from related party relationships and transactions
that are relevant to the identification and assessment of the risks of material misstatement due
to fraud.
c. To conclude, based on the audit evidence obtained, whether the financial statements, insofar
as they are affected by those relationships and transactions: a. Achieve fair presentation (for
fair presentation frameworks); or b. Are not misleading (for compliance frameworks).
d. In addition, where the applicable financial reporting framework establishes related party
requirements, to obtain sufficient appropriate audit evidence about whether related party
relationships and transactions have been appropriately identified, accounted for and disclosed
in the financial statements in accordance with the framework.
e. To make legal determination of related party transactions
___7. Who has the responsibility for the design, implementation and maintenance of adequate
controls over related party relationships and transactions so that these are identified and
appropriately accounted for and disclosed in accordance with the framework?
a. Independent external auditor
b. Management and those charged with governance
c. Securities and exchange commission
d. Stockholders
___8. The following unusual transactions that may indicate the existence of related parties or
related party transactions, except
a. Transactions which have normal terms of trade.
b. Transactions in which substance differs from form.
c. High volume or significant transactions with certain customers or suppliers as compared with
others.
d. Unrecorded transactions such as the receipt or provision of management services at no
charge.
___9. Which of the following events most likely indicates the existence of related parties?
a. Making a loan without scheduled terms of repayment of the funds.
b. Discussing merger terms with a company that is a major competitor.
c. Selling real estate at a price that differs significantly from its book value.
d. Borrowing a large sum of money at a variable rate of interest.
___10. Which of the following statements concerning related party transactions is correct?
a. In the absence of evidence to the contrary, related party transactions should be assumed to be
outside the ordinary course of business.
b. The audit procedures directed toward identifying related party transactions should include
considering whether transactions are occurring but are not being given proper accounting
recognition.
c. An auditor should determine whether a particular transaction would have occurred if the parties
had not been related.
d. An auditor should substantiate that related party transactions were consummated on terms
equivalent to those that prevail in arm’s length transactions.
___11. An auditor searching for related party transactions should obtain understanding of each
subsidiary’s relationship to the total entity because
a. This may permit the audit of intercompany account balances to be performed as of concurrent
dates.
b. This may reveal whether particular transactions would have taken place if the parties had not
been related.
c. The business structure may be deliberately designed to obscure related party transactions.
d. Intercompany transactions may have been consummated on terms equivalent to arm’s length
transactions.
___13. These are events occurring between the date of the financial statements and the date of the
auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.
a. Subsequent events
b. Event after reporting period
c. After events
d. Future events
___14. Which of the following statements concerning the auditor’s responsibility for subsequent
events is incorrect?
a. The auditor shall request management and, where appropriate, those charged with
governance, to provide a written representation that all events occurring subsequent to the
date of the financial statements and for which the applicable financial reporting framework
requires adjustment or disclosure have been adjusted or disclosed.
b. When, as a result of the procedures performed, the auditor identifies subsequent events that
require adjustment of, or disclosure in, the financial statements, the auditor shall determine
whether each such event is appropriately reflected in those financial statements.
c. The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the date of
the auditor’s report that require adjustment of, or disclosure in, the financial statements have
been identified.
d. The auditor is expected to perform additional audit procedures on matters to which previously
applied audit procedures have provided satisfactory conclusions.
___15. The following are procedures for auditing subsequent events, except
a. Obtaining an understanding of any procedures management has established to ensure that
subsequent events are identified.
b. Inquiring of management and, where appropriate, those charged with governance as to
whether any subsequent events have occurred which might affect the financial statements.
c. Reading minutes, if any, of the meetings, of the entity’s owners, management and those
charged with governance, that have been held after the date of the financial statements and
inquiring about matters discussed at any such meetings for which minutes are not yet
available.
d. Reading the entity’s latest subsequent interim financial statements, if any.
e. Performing authentication of documents concerning subsequent events.
___16. As a general rule, the auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, when, after the date of the
auditor’s report but before the date the financial statements are issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall do the following, except
a. Discuss the matter with management and, where appropriate, those charged with governance.
b. Determine whether the financial statements need amendment.
c. Inquire how management intends to address the matter in the financial statements.
d. Amend the financial statements to apply the effects of the new information.
___18. In some jurisdictions, management may not be required by law, regulation or the financial
reporting framework to issue amended financial statements and, accordingly, the auditor need not
provide an amended or new auditor’s report. However, when management does not amend the
financial statements in circumstances where the auditor believes they need to be amended, then the
auditor shall
a. If the auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion as required by PSA 705 and then provide the auditor’s report.
b. If the auditor’s report has already been provided to the entity, the auditor shall notify
management and, unless all of those charged with governance are involved in managing the
entity, those charged with governance, not to issue the financial statements to third parties
before the necessary amendments have been made. If the financial statements are
nevertheless subsequently issued without the necessary amendments, the auditor shall take
appropriate action, to seek to prevent reliance on the auditor’s report.
c. Either A or B.
d. Neither A nor B.
___19. As a general rule, after the financial statements have been issued, the auditor has no
obligation to perform any audit procedures regarding facts which become known to the auditor after
the financial statements have been issued. However, when, after the financial statements have been
issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the
auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall do the
following, except
a. Discuss the matter with management and, where appropriate, those charged with governance.
b. Determine whether the financial statements need amendment.
c. If financial statements need amendment, inquire how management intends to address the
matter in the financial statements.
d. Amend the financial statements already issued.
___20. In case the facts which become known to the auditor after the financial statements have been
issued require amendment of the financial statements and management does not take the necessary
steps to ensure that anyone in receipt of the previously issued financial statements is informed of the
situation and does not amend the financial statements in circumstances where the auditor believes
they need to be amended, what shall the auditor do?
a. The auditor shall notify management and, unless all of those charged with governance are
involved in managing the entity, those charged with governance, that the auditor will seek to
prevent future reliance on the auditor’s report.
b. If, despite such notification, management or those charged with governance do not take these
necessary steps, the auditor shall take appropriate action to seek to prevent reliance on the
auditor’s report.
c. Both A and B.
d. Neither A nor B.
___22. In inquiring of management and, where appropriate, those charged with governance, as to
whether any subsequent events have occurred that might affect the financial statements, the auditor
may inquire as to the current status of items that were accounted for on the basis of preliminary or
inconclusive data and may make specific inquiries about the following matters, except
a. Whether there have been increases in capital or issuance of debt instruments, such as the
issue of new shares or debentures, or an agreement to merge or liquidate has been made or is
planned.
b. Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the case,
for example, if such events call into question the validity of the going concern assumption.
c. Whether new commitments, borrowings or guarantees have been entered into or whether
sales or acquisitions of assets have occurred or are planned.
d. Whether the company owns the property, plant and equipment.
___23. Which of the following statements concerning the concept of going concern is incorrect?
a. Under the going concern basis of accounting, the financial statements are prepared on the
assumption that the entity is a going concern and will continue its operations for the
foreseeable future.
b. General purpose financial statements are prepared using the going concern basis of
accounting, unless management either intends to liquidate the entity or to cease operations, or
has no realistic alternative but to do so.
c. When the use of the going concern basis of accounting is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realize its assets and discharge its liabilities
in the normal course of business.
d. Philippine Accounting Standard (PAS) 1 requires external auditor to make an assessment of
an entity’s ability to continue as a going concern.
___24. What is the objective or responsibility of a financial statement auditor concerning the client’s
ability to continue as a going concern?
a. To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements.
b. To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern.
c. To report in accordance with PSA 570.
d. All of the above.
___25. The following are the procedures to be performed by a financial statement auditor concerning
the client’s use of going concern, except
a. When performing risk assessment procedures, the auditor shall consider whether events or
conditions exist that may cast significant doubt on the entity’s ability to continue as a going
concern.
b. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a
going concern.
c. The auditor shall inquire of management as to its knowledge of events or conditions beyond
the period of management’s assessment that may cast significant doubt on the entity’s ability
to continue as a going concern.
d. The auditor shall evaluate the legal implications of the company’s use of going concern
assumption.
___27. They refer to events or conditions that may cast significant doubt on the entity’s ability
to continue as a going concern.
a. Material uncertainty
b. Material scope limitation
c. Material misstatement
d. Material issue
___28. If the financial statements have been prepared using the going concern basis of accounting
but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the
preparation of the financial statements is inappropriate because the client is no longer going concern,
what opinion shall be issued by the auditor?
a. Qualified opinion or adverse opinion depending on the pervasiveness of material misstatement
with basis for Adverse Opinion section of the auditor’s report, state that the use of the going
concern is not appropriate.
b. Adverse opinion with basis for Adverse Opinion section of the auditor’s report, state that the
use of the going concern is not appropriate.
c. Qualified opinion or disclaimer depending on the pervasiveness of material scope limitation
d. Unqualified opinion with emphasis of a matter paragraph
___29. If the use of the client of going concern is appropriate but material uncertainty exists which is
adequately disclosed in the financial statements, what opinion shall be issued by the auditor?
a. Standard unqualified opinion also known as unmodified opinion
b. Unmodified opinion and the auditor’s report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to draw attention to the note in the financial
statements that discloses the matters and state that these events or conditions indicate that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a
going concern and that the auditor’s opinion is not modified in respect of the matter.
c. Qualified opinion or adverse opinion depending on the pervasiveness of material misstatement
d. Qualified opinion or disclaimer depending on the pervasiveness of material scope limitation
___30. If the use of the client of going concern is appropriate but material uncertainty exists which is
not adequately disclosed in the financial statements, what opinion shall be issued by the auditor?
a. Qualified opinion or adverse opinion depending on the pervasiveness of material misstatement
with basis for Qualified or Adverse Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going
concern and that the financial statements do not adequately disclose this matter.
b. Adverse opinion only
c. Qualified opinion or disclaimer depending on the pervasiveness of material scope limitation
d. Unqualified opinion with emphasis of a matter paragraph
___32. The following are examples of financial events or conditions that, individually or collectively,
may cast significant doubt on the entity’s ability to continue as a going concern, except
a. Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
b. Substantial operating losses or significant deterioration in the value of assets used to generate
cash flows.
c. Change from cash on delivery to credit transactions with suppliers.
d. Inability to obtain financing for essential new product development or other essential
investments.
___33. The following are examples of operating events or conditions that, individually or collectively,
may cast significant doubt on the entity’s ability to continue as a going concern, except
a. Loss of key management with replacement.
b. Shortages of important supplies.
c. Emergence of a highly successful competitor.
d. Loss of a major market, key customer(s), franchise, license, or principal supplier(s)
___34. The following are examples of other events or conditions that, individually or collectively, may
cast significant doubt on the entity’s ability to continue as a going concern, except
a. Non-compliance with capital or other statutory or regulatory requirements, such as solvency or
liquidity requirements for financial institutions.
b. Occurrence of catastrophes but fully insured.
c. Pending legal or regulatory proceedings against the entity that may, if successful, result in
claims that the entity is unlikely to be able to satisfy.
d. Changes in law or regulation or government policy expected to adversely affect the entity.
___35. It refers to the written statement by management provided to the auditor to confirm
certain matters or to support other audit evidence. It does not include financial statements, the
assertions therein, or supporting books and records.
a. Written representation
b. Written opinion
c. Written recommendation
d. Written essay
___36. Which of the following statements concerning written representations from client’s
management is incorrect?
a. Written representations are necessary information that the auditor requires in connection with
the audit of the entity’s financial statements.
b. Written representations are audit evidence.
c. The fact that management has provided reliable written representations does not affect the
nature or extent of other audit evidence that the auditor obtains about the fulfillment of
management’s responsibilities, or about specific assertions.
d. As written representations provide necessary audit evidence, they provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.
___38. The auditor shall request management to provide a written representation that it has fulfilled
its responsibility for the preparation and presentation of the financial statements as set out in the
terms of the audit engagement and, in particular, whether the financial statements are prepared and
presented in accordance with the applicable financial reporting framework. Why is it necessary for the
auditor to ask management to reconfirm its acknowledgement and understanding of its
responsibilities for the financial statements and terms of the audit in written management
representation letter?
a. Because audit evidence obtained during the audit that management is fulfilling the
responsibilities that it agreed to in the terms of the audit engagement is not sufficient without
obtaining confirmation from management that it believes that it has fulfilled those
responsibilities.
b. Because the auditor is not able to judge solely on other audit evidence whether management
has prepared and presented the financial statements and provided information to the auditor
on the basis of the agreed acknowledgement and understanding of its responsibilities.
c. Both A and B.
d. Neither A nor B.
___39. It refers to a letter signed by the client’s management during the overall review phase of audit
to confirm the management’s acknowledgement, understanding and fulfillment of its responsibilities
regarding the preparation and presentation financial statements in accordance with the applicable
financial reporting framework and the terms of audit engagement.
a. Engagement letter
b. Management representation letter
c. Comfort letter
d. Love letter
___40. What information shall be provided or confirmed by the client’s management in the
management representation letter?
a. That it has provided the auditor with all relevant information agreed in the terms of the audit
engagement.
b. That all transactions have been recorded and are reflected in the financial statements.
c. That it is solely responsible for the preparation and presentation financial statements in
accordance with the applicable financial reporting framework.
d. All of the above.
___41. What is the date of the written representations or management representation letter?
a. It shall be as near as practicable to, but not after, the date of the auditor’s report on the
financial statements.
b. It shall be as near as practicable to, even after, the date of the auditor’s report on the financial
statements.
c. It shall be as near as practicable to, but not earlier, the date of the auditor’s report on the
financial statements.
d. It shall be the same as the date of the auditor’s report on the financial statements.
___42. These are the person(s) or organization(s) (e.g., a corporate trustee) with responsibility for
overseeing the strategic direction of the entity and obligations related to the accountability of the
entity. They oversee the financial reporting process.
a. Those charged with governance
b. Management
c. External auditor
d. Internal auditor
___43. They refer to person(s) with executive responsibility for the conduct of the entity’s operations.
a. Those charged with governance
b. Management
c. External auditor
d. Internal auditor
___44. Which of the following statements concerning the auditor’s responsibility under PSA 260:
Communication with those charged with governance is incorrect?
a. PSA 260 deals with the auditor’s responsibility to communicate with those charged with
governance in an audit of financial statements.
b. Although the auditor is responsible for communicating matters required PSA 260, management
also has a responsibility to communicate matters of governance interest to those charged with
governance. Communication by the auditor does not relieve management of this responsibility.
c. Clear communication of specific matters to those charged with governance required to be
communicated by PSAs is an integral part of every audit.
d. PSA 260 establishes requirements regarding the auditor’s communication with an entity’s
management or owners even they are not charged with a governance role.
___45. What is the objective of a financial statement auditor under PSA 260?
a. To communicate clearly with those charged with governance the responsibilities of the auditor
in relation to the financial statement audit, and an overview of the planned scope and timing of
the audit
b. To obtain from those charged with governance information relevant to the audit
c. To provide those charged with governance with timely observations arising from the audit that
are significant and relevant to their responsibility to oversee the financial reporting process
d. To promote effective two-way communication between the auditor and those charged with
governance
e. All of the above.
___46. It refers to the letter prepared by the auditing firm during the completion stage of the audit. It is
addressed to the management and those charged with governance to inform them of matters
discovered during the audit that might be helpful to the company particularly regarding the
effectiveness or efficiency of internal control.
a. Comfort letter
b. Engagement letter
c. Management representation letter
d. Management letter
___48. The external auditor is required by PSA 260 to communicate to those charged with governance
the following matters, except
a. The auditor’s views about significant qualitative aspects of the entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures. When
applicable, the auditor shall explain to those charged with governance why the auditor considers a
significant accounting practice, that is acceptable under the applicable financial reporting
framework, not to be most appropriate to the particular circumstances of the entity
b. Significant difficulties, if any, encountered during the audit
c. Unless all of those charged with governance are involved in managing the entity: (i) Significant
matters arising during the audit that were discussed, or subject to correspondence, with
management; and (ii) Written representations the auditor is requesting
d. Circumstances that affect the form and content of the auditor’s report, if any
e. Any other significant matters arising during the audit that, in the auditor’s professional judgment,
are relevant to the oversight of the financial reporting process
f. The amount the external auditor receives from management to agree to the request of
management
___49. In the case of listed entities, the auditor shall communicate with those charged with governance
the following, except
a. A statement that the engagement team and others in the firm as appropriate, the firm and, when
applicable, network firms have complied with relevant ethical requirements regarding
independence
b. All relationships and other matters between the firm, network firms, and the entity that, in the
auditor’s professional judgment, may reasonably be thought to bear on independence. This shall
include total fees charged during the period covered by the financial statements for audit and non-
audit services provided by the firm and network firms to the entity and components controlled by
the entity. These fees shall be allocated to categories that are appropriate to assist those charged
with governance in assessing the effect of services on the independence of the auditor
c. The related safeguards that have been applied to eliminate identified threats to independence or
reduce them to an acceptable level.
d. The personal illicit relationship the auditor has with the management team member.
___50. The auditor shall communicate with those charged with governance the form, timing and expected
general content of communications. Which of the following statements concerning the form and timing of
communication to those charged with governance is incorrect?
a. The auditor shall communicate in writing with those charged with governance regarding significant
findings from the audit if, in the auditor’s professional judgment, oral communication would not be
adequate.
b. The auditor shall communicate in writing with those charged with governance regarding auditor
independence in case of audit of publicly listed entities.
c. The auditor shall communicate with those charged with governance on a timely basis.
d. Written communications shall include all matters that arose during the course of the audit.
___52. It refers to a letter signed and prepared by the external independent auditor and addressed to
interested users of the financial statements to give comfort but not assurance that the financial statements
are not materially misstated since the audit process is not yet completed.
a. Comfort letter
b. Engagement letter
c. Management representation letter
d. Management letter
QUIZZER
___1. Which of the following procedures would an auditor most likely perform during an audit
engagement’s overall review stage in formulating an opinion on an entity’s financial statements?
a. Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the
financial statements.
b. Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement.
c. Determine whether inadequate provisions for the safeguarding of assets have been corrected.
d. Consider whether the results of audit procedures affect the assessment of the risk of material
misstatement due to fraud.
___2. Which of the following procedures should an auditor ordinarily perform regarding subsequent
events?
a. Compare the latest available interim financial statements with the financial statements being
audited.
b. Review the cut-off bank statements for several months after the year-end.
c. Send second requests to the client’s customers who failed to respond to initial accounts
receivable confirmation requests.
d. Communicate material weaknesses in internal control to the client’s audit committee.
___4. Which of the following procedures would an auditor most likely perform in obtaining evidence
about subsequent events?
a. Determine that changes in employee pay rates after year-end were properly authorized.
b. Recompute depreciation charges for plant assets sold after year-end.
c. Inquire about payroll checks that were recorded before year-end but cashed after year-end.
d. Investigate changes in long-term debt occurring after year-end.
___5. Which of the following matters would an auditor most likely include in a management
representation letter?
a. Communication with the audit committee concerning weakness in an internal control.
___6. When considering the use of management’s written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations
a. Constitute sufficient appropriate audit evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk.
b. Are not part of the audit evidence considered to support the assertion.
c. Replace a low assessed level of control risk as audit evidence to support the assertion.
d. Complement, but not replace, substantive tests designed to support the assertion.
___8. Which of the following procedures is least likely to be performed by the auditor to identify
litigation and
claims involving the entity which may result in a material misstatement of the financial statements?
a. Confirm directly with the client’s lawyer that all claims have been recorded in the financial
statements.
b. Make appropriate inquiries of management including obtaining representations.
c. Examine legal expense accounts.
d. Use any information regarding the entity’s business including information obtained from
discussions with any in-house legal department.
___9. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to
provide the auditor with
a. A description and evaluation of litigation, claims, and assessments that existed at the balance
sheet date.
b. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
c. Corroboration of the information furnished by management about litigation, claims, and
assessment.
d. The probable outcome of asserted claims and pending or threatened litigation.
___11. Analytical procedures used in the overall review stage of the audit generally include
a. Retesting controls that appeared to be ineffective during the assessment of control risk.
b. Considering the unusual or unexpected account balances that were not previously identified.
c. Gathering evidence concerning account balances that have not changed from the prior year.
d. Performing tests of transactions to corroborate management’s financial statement assertions.
___12. After determining that a related party transaction has, in fact, occurred, an auditor should
___13. The auditor is required to perform procedures designed to obtain sufficient appropriate audit
evidence to identify all events that may require adjustment of, or disclosure in, the financial
statements up to the
a. Date of the auditor’s report
b. Date of approval of the financial statements
c. Date the financial statements are issued
d. Date of the financial statements
___14. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
a. Confirming a sample of material accounts receivable established after the date of the financial
statements.
b. Inquiring as to whether any unusual adjustments were made after the date of the financial
statements.
c. Comparing the financial statements being reported on with those of the prior period.
d. Investigating personnel changes in the accounting departments occurring after the date of the
financial statements.
___15. Which of the following statements best expresses the auditor’s responsibility with respect to
facts which become known to the auditor after the date of the auditor’s report but before the date the
financial statements are issued?
a. The auditor should amend the financial statements.
b. If the facts discovered will materially affect the financial statements, the auditor should issue a
new report which contains either a qualified opinion or an adverse opinion.
c. The auditor should withdraw from the engagement.
d. The auditor should consider whether the financial statements need amendment, discuss the
matter with management, and consider taking actions appropriate in the circumstances.
___16. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity’s future ability to continue as a going
concern.
b. The entity’s sake of a subsidiary that accounts for 30% of the entity’s consolidated sales.
c. The discovery of information regarding a contingency that existed before the financial
statements were issued.
d. The final resolution of a lawsuit disclosed in the notes to the financial statements.
___17. After an audit report containing an unqualified opinion on a 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. Describe the effects of this subsequently discovered information in a communication with
persons known to be relying on the financial statements.
b. Take no action because the auditor has no obligation to make further inquiries.
c. Determine whether the information is reliable and, if determined to be reliable, request that
revised financial statements be issued.
d. Notify the entity that the auditor’s report may no longer be associated with the financial
statements.
___19. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
a. Cash flows from operating activities are negative.
b. Stock dividends replace annual cash dividends.
c. Significant related party transactions are pervasive.
d. Research and development projects are postponed.
___20. Which of the following audit procedures most likely would assist an auditor in identifying
conditions and events that may indicate substantial doubt about an entity’s ability to continue as a
going concern?
a. Comparing the entity’s depreciation and asset capitalization policies to other entities in the
industry.
b. Reconciling cash balance per books with the cutoff bank statement and the bank confirmation.
c. Inspecting title documents to verify whether any assets are pledged as collateral.
d. Confirming with third parties the details of arrangements to maintain financial support.
___21. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
a. Restrictions on the disposal of principal assets are present.
b. Usual trade credit from suppliers is denied.
c. Significant related party transactions are pervasive.
d. Arrearages in principal stock dividends are paid.
___22. When an auditor concludes that there is substantial doubt about a continuing audit client’s
ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
a. Consider the adequacy of disclosure about the client’s possible inability to continue as a going
concern.
b. Issue a qualified or adverse opinion, depending on the pervasiveness.
c. Report to the client’s audit committee that management’s accounting estimates may need to
be adjusted.
d. Reissue the prior year’s audit report and add an emphasis of a matter paragraph that
specifically refers to substantial doubt and going concern.
___23. If, after the audited financial statements have been issued, the auditor becomes aware that
some information included in the statements is materially misleading, he or she has
a. No obligation to disclose it, assuming he or she acted in good faith and without negligence in
arriving at the audit opinion.
b. An obligation to inform the board of directors of the misleading statements.
c. An obligation to inform all users who are relying on the financial statements.
d. An obligation to make certain that users who are relying on the financial statements are
informed.
___24. A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork.
The audit client believes that this event could have a significant direct effect on the financial
statements. The auditor should
a. Disclose the event in the auditor’s report.
b. Withhold the submission of the auditor’s report until the extent of the direct effect on the
financial statements is known.
c. Advise management to adjust the financial statements.
___25. Which of the following least likely is an action that may mitigate an entity’s difficulty to
continue as a going concern?
a. Increased cash dividends.
b. Retirement of outstanding capital stock in order to improve earnings per share
c. Retirement of long-term debt in order to improve profitability
d. Disposal of property in a sale-leaseback arrangement
___26. Which of the following procedures can be performed only in the subsequent period?
a. Examination of data to determine that a proper cutoff has been made.
b. Tests of the details of balances.
c. Tests of the details of transactions.
d. Reading of the minutes of the board of director’s meetings
___27. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and
assessments, the auditor should
a. Consider the refusal to be tantamount to a scope limitation
b. Honor the confidentiality of the client-lawyer relationship
c. Seek to obtain the corroborating information from management
d. Disclose this fact in the notes to the financial statements
___28. An attorney responding to an auditor as a result of the client’s letter of inquiry may
appropriately limit the response to
a. Matters to which the attorney has given substantive attention in the form of legal consultation
or representation
b. Items, which have high probability of being resolved to the client’s detriment
c. Asserted claims and pending or threatened litigation
d. Legal matters subject to unsettled points of law, uncorroborated information or other complex
judgments
___29. The audit inquiry letter to the client’s legal counsel should be mailed only by the
a. Auditor after preparation by the client and review by the auditor
b. Client after the auditor has reviewed it for appropriate content
c. Auditor’s attorney after preparation by the client and review by the auditor
d. Client after review by the auditor’s attorney
___30. The appropriate date for the client to specify as the effective date in the audit inquiry to a
lawyer is
a. The expected date of the completion of audit field work.
b. The balance sheet date.
c. Seven working days after the request is received by the lawyer.
d. The date of the audit inquiry itself.
___34. Prior to the audit report release date, auditors have a responsibility to management’s
disclosure of subsequent events until
a. The audit report release date
b. The auditor’s report date
c. The year-end balance sheet date
d. The following year’s balance sheet date
___35. A management representation letter issued by the client and addressed to the auditor
a. Does not reduce the auditor’s responsibility
b. Is a substitute for testing
c. Is essential for the preparation of audit program
d. Reduces the auditor’s responsibility only to the extent that it is relied upon
___37. Which of the following is least likely to be included in a client’s management representation
letter?
a. Management acknowledges responsibility for illegal actions committed by employees.
b. Management has made available all financial statements and the related data.
c. No events have occurred subsequent to the balance sheet date that require adjustment to, or
disclosure in, the financial statements.
d. The company has complied with all aspect of contractual agreements that would have a
material effect on the financial statements in the event of noncompliance.
___38. Which of the following is ordinarily performed last in the audit examination?
a. Obtaining a signed management representation
b. Performing final test of control
c. Performing a review of subsequent events
d. Securing a signed engagement letter from the client
___39. Which of these persons generally does not participate in writing the management letter?
a. Client’s outsourced 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