MODULE 11: COMPLETING THE AUDIT

Question 1

1. Which of the following matters do auditors need not communicate to the audit committee of a public company?
   A. All critical accounting policies
   B. Compensation arrangements related to the chief executive officer
   C. Schedule of unadjusted differences
   D. Management letter comments

Answer 1

B. Compensation arrangements related to the chief executive officer

Question 2

2. Analytical procedures are required to be performed during the
   A. Planning and substantive test stage
   B. Substantive test and overall review stages
   C. Planning and overall review stages
   D. Planning stage only

Answer 2

C. Planning and overall review stages

Question 3

3. Which of the following factors would least influence an auditor’s consideration of the reliability of data for purposes of analytical procedures?
   A. Whether the data are processed in a computer system or in a manual accounting system
   B. Whether sources within the entity are independent of those who are responsible for the amount being audited
   C. Whether the data are subjected to audit testing in the current or prior year
   D. Whether the data are obtained from independent sources outside the entity or from sources within the entity

Answer 3

A. Whether the data are processed in a computer system or in a manual accounting system

Question 4

4. Analytical procedure are
   A. substantive tests designed to evaluate a system of internal control
   B. tests of control procedures designed to evaluate the validity of management’s representation letter.
   C. substantive tests designed to evaluate the reasonableness of financial information
   D. tests of control procedures designed to detect errors in reported financial information

Answer 4

C. substantive tests designed to evaluate the reasonableness of financial information

Question 5

5. The auditor notices significant fluctuations in key element of the company’s financial statements, if management is unable to provide an acceptable explanation, the auditor should
   A. consider the matter as a scope limitation
   B. perform additional audit procedures to investigate the matter further
   C. Intensify the examination with the expectation of detecting management fraud.
   D. Withdraw from the engagement

Answer 5

B. perform additional audit procedures to investigate the matter further

Question 6

6. Who is responsible for establishing the process and controls for preparing accounting estimates?
   A. The independent auditor
   B. The internal auditor
   C. The management
   D. The controller

Answer 6

C. The management

Question 7

7. The auditor should adopt one or combination of the following approaches in the audit of an accounting estimate:
   I. Review and test the process used by management to develop the estimate
   II. Use an independent estimate for comparison with what the management prepares.
   III. Review subsequent events which confirm the estimate made.
   A. Any of them.
   B. None of them
   C. Either I or II
   D. I only

Answer 7

A. Any of them.

Question 8

8. Which of the following is not one of the primary approaches that the auditors may use when evaluating the reasonableness of accounting estimates?
   A. Review and test management’s process of developing estimates.
   B. Confirm estimates directly with outsiders.
   C. Independently develop an estimate of the amount to be compared to management’s estimate.
   D. Review subsequent events or transactions that have been bearing on the estimate.

Answer 8

B. Confirm estimates directly with outsiders.

Question 9

9. The auditor should normally concentrate on the key factors and assumptions used by management including all of the following except those that are
   A. Insignificant to the accounting estimates
   B. Sensitive to variations
   C. Deviations from historical patterns
   D. Susceptibility to misstatements and biases

Answer 9

A. Insignificant to the accounting estimates

Question 10

10. In evaluating the assumptions on which the estimate is based, the auditor would need to pay particular attention to assumptions which are
    A. Reasonable in light of actual results in prior periods.
    B. Consistent with those used for other accounting estimates.
    C. Consistent with management’s plans which appear appropriate.
    D. Subjective or susceptible to material misstatement.

Answer 10

D. Subjective or susceptible to material misstatement.

Question 11

13. Which of the following statements that relates to subsequent events is inappropriately described?
    A. The auditor is expected to conduct a continuing review of all matters to which previous applied procedures have provided satisfactory conclusions.
    B. The auditor should consider the effect of subsequent events on the financial statements and on the auditor’s report.
    C. The procedures to identify events that may require adjustments of, or disclosure in, the financial statements would be performed as near as practicable to the date of the auditor’s report.
    D. The procedures that are designed to obtain sufficiently appropriate audit evidence that all events up to the date of the audit report that may require adjustment of, or disclosure in, the financial statements are in addition to routine procedures which may be applied to specific
    transactions.

Answer 11

A. The auditor is expected to conduct a continuing review of all matters to which previous applied procedures have provided satisfactory conclusions.

Question 11

11. Subsequent events refer to
    A. Only significant events that occur between the balance sheet date and the date of the auditor’s report which have been discovered by the auditor during the same period.
    B. Only significant events that occur between the balance sheet date and the date of the auditor’s report irrespective of the date they have been discovered by the auditor.
    C. Only significant events that occur between the balance sheet date and the date the audited financial statements have been released to the client, irrespective of the date of their discovery by the auditor.
    D. All significant events that occur after the balance sheet date.

Answer 11

B. Only significant events that occur between the balance sheet date and the date of the auditor’s report irrespective of the date they have been discovered by the auditor.

Question 12

12. Which of the following is not correct concerning a type I and type II subsequent event?
    A. A type I may require adjustments to financial statements while a type II would not.
    B. Both a type I and a type II subsequent event may require note disclosure
    C. A type I is an event that occurred prior to year end, but was discovered after, while a type II is one that arises subsequent to year end.
    D. A type II event may require adjustment to the financial statements and a type I may require note disclosure.

Answer 12

D. A type II event may require adjustment to the financial statements and a type I may require note disclosure.

Question 13

14. The auditor’s formal review of subsequent events normally should be extended through the date of the
    A. Auditor’s report
    B. Next formal interim financial statements
    C. Delivery of the audit report to client
    D. Mailing of the financial statements to the stockholders.

Answer 13

A. Auditor’s report

Question 14

17. 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 year-end.
    B. Comparing the financial statements being reported on with those of the prior period.
    C. Investigating personnel changes in the accounting department occurring after year-end.
    D. Inquiring as to whether any unusual adjustments were made after year-end.

Answer 14

D. Inquiring as to whether any unusual adjustments were made after year-end.

Question 14

15. Which of the following appropriately describes the auditor’s procedures with respect to subsequent events?
    A. The procedures to identify events that may require adjustments of, or disclosure in, the financial statements would be performed as early as practicable.
    B. Those routine procedures that are applied to specific transactions occurring after the period ends are designed to obtain sufficient appropriate audit evidence that all events up to the date of the audit report have been identified.
    C. When a component is audited by another CPA, the auditor would consider the other auditor’s procedures regarding events after period end and the need to inform the other auditor of the planned date of the audit report.
    D. The auditor is responsible to inquire regarding the financial statements after the date of the auditor’s report.

Answer 14

C. When a component is audited by another CPA, the auditor would consider the other auditor’s procedures regarding events after period end and the need to inform the other auditor of the planned date of the audit report.

Question 15

16. Which of the following is least likely a procedure that would be performed by the auditor near the auditor’s report date?
    A. Reading the minutes of the meetings of shareholders, the board of directors and adult executive committees held throughout the audit year.
    B. Reading the entity’s latest available interim financial statements.
    C. Inquiring of the client’s legal counsel concerning litigations and claims.
    D. Reviewing the procedures that management has established to ensure that subsequent events are identified.

Answer 15

A. Reading the minutes of the meetings of shareholders, the board of directors and adult executive committees held throughout the audit year.

Question 16

19. If subsequent to the issuance of the audited financial statements, the auditor becomes aware of material misstatements in the financial statements that exist prior to the date of the audit report, the auditor should
    A. Notify the parties who are currently relying on the financial statements.
    B. Discuss the matter with the management, and should take the action appropriate in the circumstance.
    C. Document such information in the audit plan for succeeding audit.
    D. Submit revised copies of the financial statements and audit report stockholders.

Answer 16

B. Discuss the matter with the management, and should take the action appropriate in the circumstance.

Question 16

21. When a new audit report is issued on financial statements because of subsequent discovery of material misstatements on previously issued financial statements, the audit report should include
    A. No modification
    B. Qualified opinion because of scope limitation
    C. Qualified opinion because of inadequate disclosure.
    D. Emphasis of a matter paragraph that refers to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements.

Answer 16

D. Emphasis of a matter paragraph that refers to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements.

Question 17

18. Which of the following should the auditor do least when, after the financial statements have been issued, the auditor becomes aware of a fact that existed at the date of the auditor’s report?
    A. Consider whether the financial statements need revisions.
    B. Discuss the matter with the management.
    C. Take the action appropriate in the circumstance
    D. Inform those users who are currently relying on the financial statements about the fact that has been discovered.

Answer 17

D. Inform those users who are currently relying on the financial statements about the fact that has been discovered.

Question 18

20. 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 her financial statements.
    D. An obligation to make certain that users who are relying on the financial statements are informed.

Answer 18

D. An obligation to make certain that users who are relying on the financial statements are informed.

Question 19

22. When a fact, that existed before the date of the report is discovered and the management revises the previously issued audited financial statements, the following are appropriate except the:
    A. New auditor’s report should include an emphasis of a matter paragraph that refers to a note to the financial statements that discusses the reason for the revision of the financial statements and to the earlier report issued by the auditor.
    B. New auditor’s report should contain the original date.
    C. Performance of the procedures that are designed to obtain sufficient evidence as to subsequent events would ordinarily be extended to the date the revised financial statements are approved by the entity’s management.
    D. Auditor is permitted to restrict the audit procedures regarding the financial statements to the effects of the subsequent event that necessitated the revision.

Answer 19

B. New auditor’s report should contain the original date.

Question 20

24. Which of the following is incorrect about the management’s responsibility to make an assessment of an entity’s ability to continue as a going concern?
    A. In assessing whether the going concern assumption is appropriate, the management takes into account all the available information for the foreseeable future, which should be at least twelve months from the balance sheet date.
    B. Through there is a history of a profitable operations and a ready access to financial
    resources, management must make its assessment with detailed analysis.
    C. Management’s assessment of the going concern assumption involves making a judgment, at a particular point of time, about the future outcomes of events or conditions which are inherently uncertain.
    D. Management should make explicit assessment of its ability to continue as a going-concern entity.

Answer 20

B. Through there is a history of a profitable operations and a ready access to financial resources, management must make its assessment with detailed analysis.

Question 20

23. The management should assess those events that may cast significant doubt about the entity’s ability to continue as a going concern for at least
    A. Two years from the balance sheet date.
    B. Two years from the date of the audit report.
    C. One year from the balance sheet date
    D. One year from the date of the audit report.

Answer 20

C. One year from the balance sheet date

Question 21

25. Which of the following least likely indicate a potential going-concern problem of an entity? A. Historical negative operating cash flows B. Failure to comply with loan covenants C. Refinancing of large short-term obligation with a medium-term loan D. Pending regulatory proceedings against the entity.

Answer 21

C. Refinancing of large short-term obligation with a medium-term loan

Question 22

26. Which of the following is correct about the auditor’s responsibility with respect to the entity’s ability to continue as going-concern? A. The auditor is responsible to make an assessment of the entity’s ability to continue as a going concern. B. The auditor’s responsibility is to consider the appropriateness of the management’s use of the going concern assumption in the preparation of the financial statements. C. The auditor can predict future events or conditions that may cause an entity to discontinue as a going concern. D. The auditor may allow the management to make an assessment of its ability to continue as a going concern if the management is believed to be objective in doing such an assessment.

Answer 22

B. The auditor’s responsibility is to consider the appropriateness of the management’s use of the going concern assumption in the preparation of the financial statements.

Question 23

28. Which of the following is an appropriate procedure to test for an indication of events or conditions that cast significant doubt on the entity’s ability to continue as going concern beyond the period assessed by management? A. Inspection B. Inquiry C. Observant D. Analysis

Answer 23

B. Inquiry

Question 24

27. In evaluating the management’s assessment of the entity’s ability to continue as a going concern, he should consider the following except: A. The independence of the management B. The process that the management has followed to make its assessment. C. The assumptions on which the assessment is based and management’s plan for future action. D. Whether the assessment of which the author is aware of as a result of the audit procedure.

Answer 24

A. The independence of the management

Question 25

29. When events or conditions have been identified to cast significant doubt on the entity’s ability to continue as a going concern, the auditor should A. Consider reassessing control risk at the maximum B. Consider the issuance of disclaimer of opinion due to scope of limitation C. Review management plans for future actions based on its going-concern assessments. D. Report the matter to the board of directors and stockholders.

Answer 25

C. Review management plans for future actions based on its going-concern assessments.

Question 26

30. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate that there could be substantial doubt about an entity’s ability to continue as going concern? A. Review compliance with the terms of debt agreements B. Confirm account receivable from principal customers C. Reconcile interest expense with debt outstanding D. Confirm bank balance

Answer 26

A. Review compliance with the terms of debt agreements

Question 27

31. The auditor relies on the client representation letter to: A. Confirm written representation given to the auditor. B. Document the continuing materiality of client representations C. Guarantee the absence of management fraud. D. Reduce the possibility of misunderstanding concerning management’s representations.

Answer 27

D. Reduce the possibility of misunderstanding concerning management’s representations.

Question 28

32. The auditors are required to obtain a letter of representation from their clients. Which of the following statements regarding the letter of representation is correct? A. A letter of representation should impress upon management its responsibility for the assertions in the financial statements. B. A letter of representation should be signed by a company’s financial officials and attorneys. C. A letter of representation documents the responses from the management to inquiries about various aspects of the audit. D. A letter of representation is a written statement from a non-independent party and as such should not be regarded as valid evidence.

Answer 28

A. A letter of representation should impress upon management its responsibility for the assertions in the financial statements.

Question 29

33. A purpose of a management representation letter is to reduce A. Audit risk to an aggregate level of misstatement that could be considered material. B. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on. C. The possibility of misunderstanding concerning management’s responsibility for the financial statements. D. The scope of an auditor’s procedures concerning related party transactions and subsequent events.

Answer 29

C. The possibility of misunderstanding concerning management’s responsibility for the financial statements.

Question 30

34. Which of the following statements is true with respect to management representations? A. Management representations are dated as of the balance sheet date. B. Management representations may serve as a substitute for various types of substantive procedures. C. Management representations are signed by the auditor and delivered to client’s officers. D. Management representations are used to corroborate information obtained during the audit.

Answer 30

D. Management representations are used to corroborate information obtained during the audit.

Question 30

36. The auditor should obtain evidence that the management acknowledges its responsibility for the fair representation of the financial statements in accordance with PFRS, and has approved the financial statements. The auditor can obtain evidence of management’s acknowledgement of such responsibility and approval I. From relevant minutes of meetings of the board of directors or similar body. II. By obtaining a written representation from the management III. By obtaining a signed copy of the financial statements. A. Any of the given procedures B. Either I or II C. I only D. None of the procedure given

Answer 30

A. Any of the given procedures

Question 30

35. When considering the use of management’s written representations as audit evidence about the completeness assertions an auditor should understand that such representations A. Complement, but do not replace substantive tests designed to support the assertion. B. Constitute sufficient evidence to support the assertion when considered in combination with a sufficiently low assessed level of control risk. C. Are not part of the evidence considered to support the assertion. D. Replace a low assessed level of control risk as evidence to support the assertion.

Answer 30

A. Complement, but do not replace substantive tests designed to support the assertion.

Question 31

37. A management representation letter would ordinarily be dated as of the A. Date the report is delivered to the entity audited. B. Date the financial statements were approved by the client managements. C. Balance sheet date of the latest period reported on. D. Date a letter of audit inquiry is received from the entity’s attorney of record.

Answer 31

B. Date the financial statements were approved by the client managements.

Question 32

38. A written representation from a client’s management that, among other matters, acknowledges its responsibility for the fair presentation of the financial statements, should normally be signed by the A. Chief executive officer and the chief financial officer B. Chief financial officer and the chair of the board of directors. C. Chair of the audit committee of the board of directors. D. Chief executive officer, the chair of the board of directors, and the client’s lawyer.

Answer 32

A. Chief executive officer and the chief financial officer

Question 33

39. If the management refuses to furnish certain written representations that the auditor believes are essential. Which of the following is appropriate? A. The auditor can rely on oral evidence relating to the matter as a basis for an unqualified opinion. B. The client’s refusal does not constitute a scope limitation that may lead to a modification of the opinion. C. The client’s refusal may have an effect on the auditor’s ability to rely on other representations of the management. D. The auditor should express an adverse opinion because of management’s refusal.

Answer 33

C. The client’s refusal may have an effect on the auditor’s ability to rely on other representations of the management.

Question 34

40. For which of the following matters should an auditor obtain written management representations? A. Management’s cost-benefit justifications for not correcting internal control weaknesses. B. Management’s knowledge of future plans that may affect the price of the entity’s stock. C. Management’s compliance with contractual agreements that may affect the financial statements. D. Management’s acknowledgement of its responsibility for employee’s violation of laws.

Answer 34

C. Management’s compliance with contractual agreements that may affect the financial statements.