Q&A Hero

Q: Your client is a large financial institution in Canada. Canadian regulators require that such financial statements have an audit report that provides an opinion on the consistency of accounting policies. How do these events affect the independent auditors report? The auditor would A) add an Other Matter paragraph titled Report on Other Legal and Regulatory Requirements. B) add an Emphasis of Matter paragraph titled Report on Other Legal and Regulatory Requirements. C) use a standard unqualified auditor's report. D) state in the opinion paragraph that the financial statements were prepared in accordance with the legislation for financial institutions.

Q: Your client is not using either ASPE or IFRS. Instead, it is using current value accounting with no use of historical cost, because your client is in a country with about 50% inflation per year. Local legislation requires that all resident organizations use current value accounting. How do these events affect the independent auditors report? The auditor would A) issue a standard unqualified auditor's report. B) use an Emphasis of Matter paragraph to explain that the financial statements are prepared in accordance with local legislation. C) use an Other Matter paragraph to explain that the financial statements are prepared in accordance with local legislation. D) state in the opinion paragraph that the financial statements were prepared in accordance with the local legislation.

Q: Your client has two sets of financial statements. One set is in compliance with IFRS, while the other set is in compliance with local tax legislation, and will be used only with the tax returns. How do these events affect the independent auditors report? The auditor would use A) an unqualified audit report for both financial statements, with an Emphasis of Matter paragraph that describes to readers the nature of the other set of financial statements. B) a standard unqualified auditor's report for both financial statements, labeling the auditor's report "for IFRS only" and "for tax purposes only." C) an unqualified audit report for both financial statements, with an Other Matter paragraph that describes to readers the nature of the other set of financial statements. D) a qualified audit report would be issued as the client may not have two different sets of financial statements.

Q: Your client has experienced a major data breach with lawsuits and fines pending of significant and uncertain amounts. These events are disclosed in the client financial statements and clearly explained in the notes. How do these events affect the independent auditors report? The auditor would use A) a standard unqualified auditor's report. B) an emphasis of matter paragraph titled "Data Breach" to highlight the events. C) an other matters paragraph titled "Data Breach" to highlight the amounts. D) a qualified audit opinion due to the size of the uncertainty.

Q: Publicly listed organizations and those using IFRS (International Financial Reporting Standards) must have audit reports that use the comparative financial statements approach. This means that the auditor reports on A) the current year's financial statements. B) both periods under audit, the current and prior year. C) three years, the current and prior year, and the effects of the prior year. D) only the ending balances of the general ledger accounts.

Q: The ASPE (Accounting Standards for Private Enterprises) financial reporting framework normally requires the auditor to report using the corresponding figures approach. This means that the auditor reports on A) the current year's financial statements. B) both periods under audit, the current and prior year. C) three years, the current and prior year, and the effects of the prior year. D) only the ending balances of the general ledger accounts.

Q: The "unqualified report with explanatory paragraph" or the "unqualified report with modified wording" A) arise as a result of an incomplete audit. B) arise when the financial statements are not quite "presented fairly." C) meet the criteria of a complete audit with satisfactory results but further explanation is required. D) meet the criteria of a complete audit but with unsatisfactory results.

Q: Bianca Jones was engaged to conduct the audit of Smilicor Company, a toy distributor, three months after the year end date. Bianca was unable to conduct an audit of opening inventory, but was able to satisfy herself with respect to the opening balances. She was also able to conduct audit procedures for other opening balances, for example, by observing fixed assets. What type of audit opinion would Smilicor receive? A) Disclaimer B) Adverse C) Qualified D) Unqualified

Q: Three of the following conditions would, by themselves, require the auditor to issue a report other than an unqualified report. Which one would permit a standard unqualified report? A) The financial statements show a significant net loss for each of the last three years, including the current fiscal period. B) The financial statements have not been prepared in accordance with an acceptable financial reporting framework and are misleading. C) The auditor is not independent during the fiscal period under audit. D) The scope of the auditor's examination has been restricted, although the cause of the restriction was not the client's fault.

Q: A deviation from the standard unqualified report will cause knowledgeable users of financial statements to recognize that the A) auditor intends to communicate additional or limiting information. B) financial statements contain a material error. C) financial statements contain an error. D) Canadian Auditing Standards were not followed.

Q: Analyze the "Auditor Responsibility Section" of the standard Independent Auditor's Report, ie. explain the intended purpose of the sentences in this section.

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

Q: Discuss the purpose of a management letter.

Q: The management letter A) is required by the CAS whenever there are "reportable conditions." B) must follow the format prescribed by the CICA. 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.

Q: CAS 450 requires the auditor to communicate all misstatements to the audit committee A) if the misstatements are slightly material. B) if the misstatements are material. C) if the misstatements are other than trivial. D) regardless of materiality.

Q: State the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit.

Q: CAS 250 requires the auditor to communicate illegal acts to the audit committee A) if the illegal acts are slightly material. B) if the illegal acts are material. C) if the illegal acts are other than trivial. D) regardless of materiality.

Q: When several staff are working together on an audit engagement, what type of quality control review is conducted on a daily basis? A) the partner reviews the electronic files B) team review by interview C) second partner review D) manager review of sections

Q: The initial review of the working papers prepared by any given auditor is normally done by the A) partner assigned to the audit. B) supervisor or manager. C) senior. D) immediate supervisor.

Q: There are often a large number of immaterial errors discovered that do not require an adjustment at the time they are found. How should these errors be dealt with by the auditor? A) Since these items are individually immaterial, the auditor would not recommend adjusting entries to client. B) Since there are a large number of these, the auditor would recommend adjusting entries to the client. C) The auditor must combine the individually immaterial errors and evaluate whether the combined amount is material. D) The auditor would never combine these individually immaterial amounts because that would mix apples and oranges.

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

Q: Besides the search for contingent liabilities and the review for subsequent events, the auditor has four important final evidence accumulation responsibilities, all of which are required by current professional auditing standards. Discuss each of these four responsibilities.

Q: List four specific matters that should be included in a client representation letter.

Q: A) Discuss the purposes of performing analytical procedures during the audit completion phase. B) State the two purposes of the client representation letter.

Q: Klein Corporation has reported a loss for the 6th year in a row. Klein also has a large bank loan due in the coming year, bringing its current ratio to .60. Further, due to the economic crisis, Klein had to increase its bad debt expense by 4% and also saw its largest client, Forest Prairie filing for bankruptcy. Forest Prairie's purchases made up 18% of the total sales of Klein in the past year. Forest Prairie also had an unpaid balance to Klein at year end. In trying to reduce expenses, Klein has reduced the employee training from 5 days to 1 day. During the year, an employee was seriously injured in the production process when his arm was caught in a press. The employee has filed a lawsuit against Klein for $1,000,000 as he claims that he was not properly trained to use the equipment. The legal proceeding for this case should begin in the next fiscal year. Since Klein has never been involved in such as lawsuit before, the legal counsel indicated that they were not able to estimate the amount and likelihood that Klein would have to pay. Required: Evaluate the going concern situation at Klein and indicate what the auditor would be required to do under CAS 570.

Q: In addition to the financial statements, MD&A (management discussion and analysis) are appended to the financial statements to inform users of management's expectations for the foreseeable future, as well as to provide management's assessment of the financial results. MD&A is prepared primarily because it is A) an additional piece of evidence used by auditors to assess the financial statements. B) generally required by securities regulators in Canada. C) an unbiased view of the prospective future results of the company. D) required so that the company can borrow more funds or sell more shares to the public.

Q: The 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 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.

Q: A client representation letter is a written statement from a non-independent source and therefore A) cannot be regarded as reliable evidence on its own. B) can be regarded as reliable evidence only if the auditor finds strong internal controls. C) can be regarded as reliable evidence if the high-level corporate officials who sign it are trustworthy. D) needs to be confirmed by an outside, independent source such as a financial institution, or law firm.

Q: One of the purposes of a client representation letter is to A) reduce the amount of audit procedures performed by the auditor. B) document the responses from management to inquiries about various aspects of the audit. C) serve as audit evidence for the accuracy of the contingent liabilities. D) reduce the detection risk.

Q: Refusal by a client to prepare and sign the representation letter would require a(n) A) qualified opinion as to scope limitation or a disclaimer of opinion. B) adverse opinion or a denial of opinion. C) qualified opinion as to accounting treatment departure or an adverse opinion. D) unqualified opinion with an explanatory paragraph.

Q: 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 client representation letter D) Testing of the purchasing function

Q: 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) representation letter. C) engagement letter. D) letters testamentary.

Q: CAS 570 - Going Concern, requires that the auditor evaluates management's assessment of the ability of the entity to continue as a going concern based on A) inquiry with management. B) the opinion of the legal counsel of the company. C) the liquidity and solvency ratios of the firm. D) the evidence collected throughout the audit.

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

Q: State the two primary types of subsequent events that require consideration by management and evaluation by the auditor, and give two examples of each type.

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

Q: Discuss three audit procedures commonly used to search for contingent liabilities.

Q: State the three conditions required for a contingent liability to exist.

Q: As part of the review for subsequent events, the auditor will review financial statements prepared after the balance sheet date. The statements should be discussed with management to determine whether they A) were approved by the controller prior to your review. B) are mathematically correct, including calculation of depreciation. C) are prepared on the same basis as the current-period statements. D) were completed on a comparative basis, showing the last three years.

Q: 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 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.

Q: Kendra is inquiring about subsequent events with regards to lawsuits and contingent claims. To obtain a meaningful answer, Kendra should hold the enquiry with A) the Vice President, legal of the company. B) the accountant in charge of the legal liability reconciliation. C) the mail clerk. D) the assistant controller.

Q: Inquiries of management are used to help identify subsequent events. To help obtain meaningful answers A) the standard firm checklist should be followed. B) these inquiries must be conducted with the proper client personnel. C) the inquiries should be conducted by senior audit personnel. D) they should be asked after the effective date of the audit report.

Q: 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 are in category 2? A) Examine subsequent-period sales and purchases transactions to determine whether the cutoff is accurate. B) Correspond with lawyers. C) Test the collectability of accounts receivable by reviewing subsequent period cash receipts. D) Compare the subsequent period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation.

Q: 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 are in category 1? 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.

Q: A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor's fieldwork. The auditor should A) advise management to adjust the balance sheet to reflect the acquisition. B) issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end. C) advise management to disclose the acquisition in the notes to the financial statements. D) disclose the acquisition in the opinion paragraph of the auditor's report.

Q: 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 flood C) major purchase of a business that is expected to double the sales volume D) settlement of litigation in excess of the recorded liability

Q: 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 December 31 financial statements? 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

Q: Subsequent events affecting the valuation of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent the A) culmination of conditions that existed at the balance sheet date. B) final estimates of losses relating to casualties occurring in the subsequent events period. C) discovery of new conditions occurring in the subsequent events period. D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Q: The following events all occurred after the balance sheet date (6/30/12) but prior to the auditor's report (9/10/12). Which one would require an adjustment to the account balances as of 6/30/12? A) Client will market a new series of equity securities ($2 million of preferred stock) on 8/1/12. B) Unused equipment on the books at 6/30/12 for $100,000 was disposed of 7/31/12 for $60,000. C) Securities costing $30,000 held for temporary investment on 6/30/12 declined in value by one-third when the market took a plunge on 8/15/12. D) Inventory valued at $100,000 on 6/30/12 was destroyed in a fire on 8/1/12.

Q: Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation A) did not take place until after year-end. B) did take place before year-end. C) occurred both before and after year-end. D) are reimbursable through insurance policies.

Q: The auditor's responsibility for "reviewing the subsequent events" of a client is normally limited to the period of time beginning with the A) balance sheet date and ending with the date of the auditor's report. B) start of the fiscal year under audit and ending with the balance sheet date. C) start of the fiscal year under audit and ending with the date of the auditor's report D) balance sheet date and ending with the date the registration statement becomes effective.

Q: The auditor has a responsibility to review transactions and activities occurring after the year-end to determine whether anything occurred that might affect the valuation or disclosure of the statements being audited. The auditing procedures required to verify these transactions are commonly referred to as the review for A) contingent liabilities. B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events.

Q: 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 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 (ie. scope limitation).

Q: 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? 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

Q: The standard letter of confirmation from client's legal counsel should ask for information about the period of time A) covered by client's financial statements. B) covered by client's financial statements plus the preceding year. C) covered by client's financial statements plus the succeeding year. D) approximately up to the date of the auditor's report.

Q: 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? 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

Q: What action will a lawyer likely take if they have information about a law suit that was not mentioned by the client? A) in the legal letter, tell the auditor the number of suits, and request the auditor to contact the client B) request the client to notify the auditor about the lawsuit C) they will not mention the lawsuits, they are confidential D) the law firm will refuse to answer the legal letter, since it is incorrect

Q: The standard letter of confirmation sent to the client's legal counsel should be prepared on the A) auditor's stationery and signed by an audit partner. B) lawyer's stationery and signed by the lawyer. C) client's stationery and signed by a company official. D) plain paper and be unsigned.

Q: Which of the following substantive tests would the auditor conduct as a search for contingent liabilities? A) select an attribute sample of legal expenses for matching to invoices B) select a dollar unit sample of legal expenses, for matching to invoices C) inspect legal expense invoices, doing a census test of legal expenses D) review a sample of legal invoices, looking for appropriate authorization for payment

Q: Which of the following procedures might be useful in discovering a contingent liability for a lawsuit that management is intentionally neglecting to disclose? A) Inquiries (orally and in writing) of management B) Analyze legal expense and review invoices and statements from outside legal counsel C) Review current and previous years' Canada Revenue Agency correspondence D) Obtain a letter of representation from management that it is not aware of any undisclosed contingent liabilities

Q: There are two categories of lawsuits: an outstanding (or asserted) claim, and a(n) A) possible or unasserted claim. B) disputed claim among several parties. C) settled claim. D) claims that could result in material misstatements.

Q: Management furnishes the auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information? Request that client A) lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. B) management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. C) lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. D) management engage outside lawyers to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.

Q: What audit approach is used to search for unknown commitments? A) Include as part of the search for subsequent events B) Conduct with substantive tests associated with the cutoff assertion C) Perform as part of the audit of each cycle or audit area D) Include with the legal letter sent to lawyers

Q: An agreement which commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole is a definition of a A) contingent liability. B) potentially hazardous agreement. C) commitment. D) conditional contract.

Q: When auditing contingent liabilities, the primary objective at the initial stage of the tests is to determine A) the materiality of any liability. B) what constitutes adequate disclosure of the liability. C) the likelihood of the liability. D) the existence of the liability.

Q: The auditor's responsibility with regards to contingent liabilities is to A) identify the appropriate accounting treatment. B) decide on the appropriate accounting treatment. C) prepare note disclosure. D) evaluate the accounting treatment of known contingent liabilities.

Q: 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? 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

Q: 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)? 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

Q: If a potential loss on a contingent liability is unlikely and the event will not likely have a significant adverse financial effect, the liability should be A) accrued and indicated in the body of the financial statements. B) disclosed in footnotes, but not accrued. C) neither accrued nor disclosed in footnotes. D) disclosed in the auditor's report but not disclosed on the financial statements.

Q: Which of the following scenarios regarding a lawsuit filed against a client by a third party would qualify as a "contingent liability"? A lawsuit has been filed A) but not yet resolved. B) and concluded with the client winning. C) and concluded with a third party winning an award of $100,000, but the client hasn't paid yet. D) and concluded with a third party winning an award of $100,000, which the client paid after the balance sheet date but before the statements are issued.

Q: If a potential loss on a contingent liability is likely and the amount of the loss can be reasonably estimated, the liability should be A) accrued and indicated in the body of the financial statements. B) disclosed in footnotes, but not accrued. C) neither accrued nor disclosed in footnotes. D) disclosed in the auditor's report but not disclosed on the financial statements.

Q: If the amount of a probable loss on a contingent liability cannot be estimated, but the event is likely, the liability should be A) accrued and indicated in the body of the financial statements. B) disclosed in footnotes, but not accrued. C) neither accrued nor disclosed in footnotes. D) disclosed in the auditor's report but not disclosed on the financial statements.

Q: If the amount of a probable loss on a contingent liability is not determinable, the liability should be A) accrued and indicated in the body of the financial statements. B) disclosed in footnotes, but not accrued. C) neither accrued nor disclosed in footnotes. D) disclosed in the auditor's report but not disclosed on the financial statements.

Q: 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 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 client has taken to ensure that it doesn't recur.

Q: What situation represents a contingent liability for a company? A) A candy company's monthly production requires 1,000 kg of chocolate. The company entered into a contract with a chocolate producer to purchase 6,000 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, 2012, as the front wheel of the bike was released in a curb as a result of a manufacturing defect. The company has not received a claim at December 31st, 2012 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 with on-line reservations. The hotel chain will have to pay $50,000 to various customers in the following year.

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

Q: Which level of risk does the auditor normally assign to the presentation and disclosure-related assertion of completeness for contingent liabilities and subsequent events? A) low risk for inherent risks that required information may not be disclosed in the notes B) medium for control risk with respect to identifying relevant events C) medium with respect to providing adequate detail for the notes D) high that all required information may not be disclosed in the notes

Q: 19.1 Design and perform audit tests related to presentation and disclosure audit objectives

Q: Describe the audit procedures and related audit assertions for the audit of dividends.

Q: State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.