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auditing
Auditing and Assurance Services 6th edition Timothy Louwers, Robert Ramsay, David Sinason, Jerry Straws - Solutions
What are some of the benefits of audit documentation review to a public accounting firm?
What procedures do auditors perform to identify subsequent events?
Identify the two types of subsequent events. How should information about these events be reflected in the financial statements?
What are auditors’ responsibilities for subsequently discovered facts if these are identified (a) Prior to the audit report release date and (b) Following the audit report release date?
What steps should auditors take if, after the audit report release date, they discover that an important audit procedure was omitted?
Identify information that auditors are required to communicate to individuals charged with governance of the client.
Which of the following best describes the role of analytical procedures near the end of the audit engagement?a. To identify possible deficiencies in the client’s internal control over financial reporting.b. To identify accounts that appear to be misstated with the intention of planning the
A major objective of written representations is to a. Shift responsibility for financial statements from the management to auditors. b. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform. c. Provide management an opportunity to make
Which of these substantive procedures is not used to obtain evidence about contingencies? a. Scanning expense accounts for credit entries. b. Obtaining a letter from the client’s attorney. c. Reading the minutes of the board of directors’ meetings. d. Examining terms of sale in sales contracts.
Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? a. Sale of an issue of new stock for $ 500,000 on January 30. b. Settlement of a damage lawsuit for a customer’s injury sustained February 15 for $ 10,000. c. Settlement of
A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2014. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were
Auditors have a responsibility related to management’s disclosure of new information related to subsequent events until a. The date of the financial statements. b. The date of the auditor’s report. c. The audit report release date. d. The following year’s date of the financial statements.
The auditing standards regarding subsequently discovered facts refers to knowledge obtained after a. The date the fieldwork began. b. The date of the auditor’s report. c. The date of the financial statements. d. The date interim audit work was complete.
Which of the following is not required by generally accepted auditing standards? a. Written representations. b. Attorney letter. c. Management letter. d. Engagement letter.
Which of these persons generally does not participate in writing the management letter? a. Client’s outside 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.
Which of the following is ordinarily performed last in the audit examination? a. Securing a signed engagement letter from the client. b. Performing tests of controls. c. Performing a review for subsequent events. d. Obtaining signed written representations.
Which of the following normally occurs earliest in the audit examination? a. Discovery of an omitted audit procedure. b. Dual dating the auditor’s report on the entity’s financial statements for subsequent events that exist at the date of the financial statements. c. Preparation of the
Ambrose is auditing the financial statements of Mays (dated December 31, 2014). The date of the auditor’s report is February 17, 2015, and the audit report release date is February 20, 2015. For which of the following matters would Ambrose have the least responsibility? a. The obsolescence of
Which of the following statements is most likely to be included in an attorney letter? a. “Certain representations in this letter are described as being limited to matters that are material.” b. “If any unasserted claims or assessments are omitted from this disclosure, please pro-vide this
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate? a. Perform the omitted procedure or an alternative procedure. b. Notify the board of directors and regulatory agencies
Which of the following statements is not true with respect to written representations?a. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion.b. They should address management’s responsibility for designing
Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on
What is an auditor’s primary method to corroborate information on litigation, claims, and assessments? a. Examining legal invoices sent by the client’s attorney. b. Verifying attorney- client privilege through interviews. c. Reviewing the response from the client’s lawyer to a letter of audit
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events? a. Compare the latest available interim financial statements with the financial statements being audited. b. Send second requests to the client’s customers who failed to respond to
Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? a. Recompute a sample of large- dollar transactions occurring after the date of the financial statements for arithmetic accuracy. b. Investigate changes in
The primary reason auditors request responses to attorney letters is to provide auditors a. The probable outcome of asserted claims and pending or threatened litigation. b. Corroboration of the information furnished by management about litigation, claims, and assessments. c. The attorney’s
The scope of an audit is not restricted when an attorney letter limits the response to a. Matters to which the attorney has given substantive attention in the form of legal representation. b. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. c. The
Hart, an assistant accountant with the firm of Better & Best, CPAs, is auditing the financial statements of Tech Consolidated Industries Inc. The firm’s audit plan calls for the preparation of written representations.Required:a. In an audit of financial statements, in what circumstances are
During the audit of the annual financial statements of Amis Manufacturing Inc., the company’s president, Vance Molar, and Wanda Dweebins, the engagement partner, reviewed matters that were supposed to be included in written representations. Amis Manufacturing is not subject to the reporting
Each of the following statements is a communication from management. Indicate whether the inclusion of each statement in written representations is appropriate. Provide your rationale for any statements whose inclusion in written representations is not appropriate. a. “Certain representations in
Classify each of the following issues according to whether they will be (1) Included in written representations in all audits, (2) Included in written representations in audits of public entities (under AS 5), or ( 3) not included in written representations: a. Management acknowledgment of its
The firm of Cole & Cole, CPAs, is auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2014. On May 6, 2015, C. R. Brown, Consolidated’s chief financial officer, gave the auditors a draft of an attorney letter for Cole’s review before mailing it to
Faye Jaworski, CPA, is auditing the financial statements of Fulbright Company. As she is nearing the audit completion date, Jaworski realizes that she needs to evaluate whether all material contingencies are properly accounted for and disclosed in Fulbright’s financial statements. Because
Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these
During the conduct of an audit, auditors may identify misstatements as a result of the completion of their substantive procedures. An important activity performed in the completion stages of the audit is considering the materiality of misstatements identified during the audit.Required:a. What is an
Pat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the last three years. These misstatements are immaterial and have related to isolated matters. In this summary, parentheses imply that the
The following subsequent event was disclosed in Dole Food Company’s 2009 annual report: Note 24: Subsequent Event On February 27, 2010, a significant earthquake struck the country of Chile. Although Dole’s Chilean operations resumed business after the earthquake in a matter of days, Dole is
From the SEC’s website (www.sec.gov), access any company’s 10- K and review its footnote disclosures related to pending litigation.Required:a. Briefly summarize the nature of pending litigation facing the company you selected.b. From the auditors’ perspective, what is the primary concern with
Omitted Procedures and Subsequently Discovered Facts—Internet Exercise. From the “Inspections” section of the PCAOB’s website, access the most recent inspection reports for each of the Big Four firms (Deloitte, EY, KPMG, and PwC). Each inspection report contains the following
Subsequent Events and Subsequently Discovered Facts. Michael Ewing is auditing the financial statements of Dallas Company for the year ended December 31, 2014. In concluding the process of gathering sufficient appropriate evidence, Ewing has asked to meet with his supervisor on the audit (John
Crankwell Inc. is preparing its annual financial statements and annual report to stockholders. Management wants to be sure that all of the necessary and proper disclosures have been incorporated into the financial statements and the annual report. Two classes of items that have an important bearing
You are in the process of completing the gathering of sufficient appropriate evidence for Top Stove Corporation, a company engaged in the manufacture and sale of kerosene space heaters. To date there has been every indication that the financial statements of the client present fairly the position
In connection with your examination of the financial statements of Olars Manufacturing Corporation for the year ended December 31, your post-balance -sheet substantive procedures disclosed the following items: 1. January 3. The state government approved a plan for the construction of an express
On June 1, Sidney Faultless of A. J. Faultless & Co., CPAs, noticed some disturbing information about the firm’s client, Hopkirk Company. A story in the local paper mentioned the indictment of Tony Baker, whom Faultless knew as the assistant controller at Hopkirk. The charge was mail fraud.
Consider a pendulum swinging to and fro. At what point in its motion is the KE of the pendulum bob at a maximum? At what point is its PE at a maximum? When its KE is half its maximum value, how much PE does it have?
Subsequent Events, Subsequently Discovered Facts, and Omitted Procedures. Jay Ralph completed the December 31, 2014, audit of Raider Company on February 3, 2015; Raider’s financial statements and Ralph’s reports on Raider’s financial statements and internal control over financial reporting
For each of the following independent situations, describe the most appropriate course of action that the auditors should take. a. Drew Allison is conducting the audit of Anderson Inc. as of December 31, 2014. At the beginning of the evidence gathering, Allison becomes aware that one of
Omega Corporation is involved in a lawsuit brought by a competitor for patent infringement. The competitor is asking $ 14 million actual damages for lost profits and unspecified punitive damages. The lawsuit has been in progress for 15 months, and Omega has worked closely with its outside counsel
Accounting for a Contingency: Attorney Letter Information. Central City was involved in litigation brought by Mexican American Legal Defense and Educational Fund (MALDEF) over the creation of single- member voting districts (which require candidates to receive only the highest number of votes, even
Mini- Case: Going- Concern Reporting. Refer to the mini-case “GM: Running on Empty” on page C11 and respond to questions 1– 6.1. Reviewing GM’s financial information in GM Exhibit 1 and its stock price in GM Exhibit2 , when do you first see signs of GM’s impending financial distress? 2.
Kaplan CPA Exam Simulation: Attorney Letters. Required:Go to the Kaplan website link at www.mhhe.com/ louwers6e, click on XYZ Co. (Attorney Letters) AUD TBS, and complete your answer. Only complete the column related to “Audit Response (report).”
What are roll- forward procedures? Provide some examples.
Why are written representation and attorney letters obtained near the end of the evidence- gathering process and dated on the date of the auditor’s report?
How should auditors respond if the client refuses to furnish written representations?
What responsibility do auditors have for evaluating a client’s ability to continue as a going concern?
Identify the two methods of evaluating the performance materiality of uncorrected misstatements. What are the requirements of Staff Accounting Bulletin No. 108 for evaluating the performance materiality of these misstatements?
What is an engagement quality review?
What is the purpose of dual dating the auditor’s report?
Identify the reports that accompany the financial statements of public entities and non-public entities.
What are the audit requirements for nonpublic and public entities?
Identify the four major sections of the auditors’ standard (unmodified) report and the major contents of each section.
What are the major differences in the auditors’ report for nonpublic and public entities?
What are the types of opinions and the conclusion of each type of opinion?
How is the auditors’ standard (unmodified) report modified for qualified or adverse opinions issued as a result of departures from GAAP?
Distinguish between client- imposed scope limitations and circumstance- imposed scope limitations. Which of these scope limitations is generally of more concern to auditors?
If a scope limitation exists and auditors cannot perform alternative procedures, what are the auditors’ reporting options?
When a scope limitation exists, how would the standard (unmodified) report be modified to express(a) A qualified opinion and(b) A disclaimer of opinion?
Define group auditors and component auditors. What issues are introduced when component auditors examine a division, subsidiary, or segment of group financial statements?
What options are available to group auditors when component auditors are involved in the examination of group financial statements?
Is the reference in the auditors’ report to work performed by component auditors a scope limitation? Explain.
Define e mphasis- of- matter and o ther- matter paragraphs. What type of information do auditors provide in these paragraphs?
What types of matters would result in the auditors’ report being modified for consistency?
What circumstances lead auditors to have substantial doubt about an entity’s ability to continue as a going concern?
What is the auditors’ reporting responsibility for (a) Other information accompanying the audited financial statements and (b) Required supplementary information?
What is an updated report? What is a reissued report?
If auditors wish to express a different opinion on prior- years’ financial statements in the current report than in a previously- issued report, how should their current report be modified?
What reporting options are available if predecessor auditors examined prior- years’ financial statements presented in comparative form?
Briefly describe the options and information provided by auditors when engaged to report on (a) Summary financial statements and (b) Supplementary information?
When reporting under GAAS, certain statements are required in all auditors€™ reports (€œexplicit€) and others are required only under certain conditions (€œimplicit€). Which combination that follows correctly describes the auditors€™
Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? a. Unmodified opinion or disclaimer of opinion. b. Unmodified opinion
The auditors determined that the entity is suffering financial difficulty and its going- concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors’ report
Which of the following is not a difference in the audit examinations and reports for public and nonpublic entities? a. Audit examinations for nonpublic entities are based on user demand but based on legislative requirements for public entities. b. The reports for both public and nonpublic entities
Which of these situations would require auditors to append an emphasis- of- matter paragraph about consistency to an otherwise unmodified opinion? a. Entity changed its estimated allowance for uncollectible accounts receivable. b. Entity corrected a prior mistake in accounting for interest
Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal’s comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year a. Only
When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that a. Refers to the component auditors, describes the extent of the component auditors’ work, and expresses an unmodified opinion. b. Does not consider or evaluate the
When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. The introductory paragraph. b. The opinion paragraph.
Under which of the following conditions can a disclaimer of opinion never be issued? a. The entity’s going- concern problems are highly material and pervasive. b. The entity does not allow the auditors access to evidence about important accounts. c. The auditors own stock in the entity. d. The
How is the auditors’ responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report? a. Stated explicitly in the Auditor’s Responsibility section. b. Unstated but understood in the Auditor’s Responsibility section. c. Stated explicitly in the
Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? a. Megabank. b. Samson & Delilah. c. Company A. d. Company B.
Which of the following is not included in the standard (unmodified) report on the financial statements? a. An identification of the financial statements that were audited. b. A general description of an audit. c. An opinion that the financial statements present financial position in accordance
If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report?
When financial statements are presented in comparative form and another firm audited the prior- years’ financial statements (but the other firm’s report is not presented with the financial statements), the auditors’ report on the current- year financial statements should a. Disclaim an
If the opinion issued on prior- years’ financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors’ current report should a. Not reference the prior- years’ financial statements. b. Indicate that the opinion on the prior- years’
The concepts of materiality and pervasiveness are important to auditors in examinations of financial statements and expressions of opinion on these statements. Required: How will materiality influence auditors’ reporting decisions in the following circum-stances? In your response, consider both
For each of the following departures from GAAP, indicate the type of opinion that the auditors would issue as well as any modifications that would be made to the standard (unmodified) report.a. A departure that had an immaterial effect on the financial statements.b. A departure that had a material
Situations in which auditors are unable to obtain sufficient appropriate evidence necessary to support their opinion on the entity’s financial statements are referred to as scope limitations.Required:a. Distinguish between client- imposed scope limitations and circumstance- imposed scope
Following are four possible scenarios that reflect scope limitations encountered by J. Bruce, CPA, during the audit of Weaver Inc. In all cases, assume that the ending balance in inventory is material to Weaver’s financial position, results of operations, and cash flows.Scenario A. Because of the
D. Brady has been engaged as the auditor of Patriot Company and is currently planning the year-end physical inventory counts. Patriot is a retailer that holds significant inventories in its warehouses and stores in six regions across the United States. Because of timing and logistics, Brady is able
Lando Corporation is a domestic company with two wholly- owned subsidiaries. Michaels, CPA, has been engaged to audit the financial statements of the parent company and one of its subsidiaries and to serve as the group auditor. Thomas, CPA, has audited the financial statements of the other
Assume that the auditors encountered the following sepa-rate situations when deciding on the report to issue for the current- year financial statements. 1. The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity
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