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Flashcards in A1-5 Deck (34)
1

After issuing an auditor's report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?

a.

Notify each member of the board of directors that the auditor's report may not be associated with the financial statements from this point forward.

b.

Notify regulatory agencies having jurisdiction over the client that the auditor's report should not be relied upon from this point forward.

c.

Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.

d.

Issue revised financial statements and auditor's report describing the reason for the revision in a note to the financial statements.

Choice "c" is correct. If an auditor becomes aware of material information that would have affected the report, and that persons are currently relying or are likely to rely on the financial statements covered by the report, the auditor should take appropriate action. In order to do this, the auditor must first determine whether there are indeed persons relying or likely to rely on the financial statements.

Choice "a" is incorrect. This step would occur only if necessary after it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.

Choice "d" is incorrect. This step would occur only if necessary after it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.

Choice "b" is incorrect. This step would occur only if it is determined that there were persons currently relying or likely to rely on the financial statements covered by the report.

2

Jules, CPA, is reporting on comparative financial statements, but Shah, CPA conducted the previous year's audit. Which of the following is not true in this situation?

a.

If Shah's report was qualified due to a scope limitation, Jules may still issue an unmodified opinion on the current year's financial statements.

b.

Dual dating may be used to indicate the appropriate dates for each audit.

c.

If Shah's report will be presented, management will need to provide a representation letter to Shah.

d.

If Shah's report is not presented, an other-matter paragraph should be included to describe this situation.

Choice "b" is correct. Dual dating is used when there is a subsequent event occurring after the original date of the auditor's report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financial statements (the date appropriate for the most recent audit is used in this case).

Choice "d" is incorrect. When the successor auditor does not present the predecessor auditor's report, the successor auditor should express an opinion on the current period financial statements only and indicate in an other-matter paragraph (below the opinion paragraph) that the financial statements of the prior period were audited by a predecessor auditor, the type of opinion expressed by that predecessor auditor, the nature of any emphasis-of-matter or other-matter paragraphs included, and the date of the predecessor auditor's report.

Choice "a" is incorrect. Different opinions may be issued for the different years presented.

Choice "c" is incorrect. Shah will be required to obtain a letter of representation from management in this situation.

3

An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor's present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if the:

a.

Financial statements and auditor's report were not distributed beyond management and the board of directors.

b.

Auditor's previously expressed opinion was qualified because of a departure from GAAP.

c.

Results of other procedures that were applied tend to compensate for the procedure omitted.

d.

Omission is due to unreasonable delays by client personnel in providing data on a timely basis.

Choice "c" is correct. When the auditor concludes that an auditing procedure considered necessary at the time of the audit was omitted, the auditor should assess the importance of the procedure to the present ability to support the previously issued opinion. The results of other procedures that were applied may tend to compensate for the one omitted or make its omission less important.

Choice "a" is incorrect. If a procedure has been omitted, the auditor must consider whether other parties may be relying on the financial statements, even if the audit report had limited distribution.

Choice "b" is incorrect. The fact that the previous opinion was qualified does not negate the need to apply the omitted procedure.

Choice "d" is incorrect. Delays by client personnel may extend audit work, but do not provide a reason for omitting a procedure.

4

On February 25, a CPA issued an auditor's report expressing an unmodified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to:

a.

Notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied on.

b.

Notify each member of the entity's board of directors about management's refusal to adjust the financial statements.

c.

Issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements.

d.

Issue revised financial statements and distribute them to each creditor known to be relying on the financial statements.

Choice "b" is correct. Since the material loss affects the audit report and there are creditors relying on the financial statements, the client properly should adjust the financial statements. Since they are refusing to do so, the auditor would most likely notify the board of directors of the situation in an attempt to encourage the adjustment.

Choice "a" is incorrect. The auditor would only notify the creditors if the board of directors was unable to facilitate the proper adjustment.

Choice "d" is incorrect. The auditor cannot issue revised financial statements; only the client can do that.

Choice "c" is incorrect. If the board of directors is unable to facilitate the proper adjustment, the auditor would no longer allow the audit report to be associated with the financial statements, but the auditor would not issue a revised report.

5

On February 9, Brown, CPA, expressed an unmodified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first:

a.

Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion.

b.

Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

c.

Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements.

d.

Take no additional action because subsequent events have no effect on the financial statements that were reported on.

Choice "b" is correct. If an omitted audit procedure is discovered, the auditor should assess the importance of the omitted procedure to the auditor's ability to support the opinion. It might be the case that other audit procedures tended to compensate for the omitted procedure, in which case no further action would be necessary.

Choice "a" is incorrect. The auditor would only request permission to perform substantive procedures if no other procedures compensated for the missing one, and if there were persons relying (or likely to rely) on the financial statements.

Choice "c" is incorrect. The auditor would need to determine whether there were persons relying (or likely to rely) on the financial statements, but this would not be done unless it had already been determined that no other audit procedures compensated for the missing one.

Choice "d" is incorrect. If the omitted audit procedure impairs the auditor's ability to support the opinion, no other procedures compensated for the missing one, and there were persons relying (or likely to rely) on the financial statements, the auditor would need to apply substantive procedures. Taking no action would not be an acceptable response.

6

After issuing an auditor's report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless:

a.

A final resolution is made of a contingent liability that had been disclosed in the financial statements.

b.

Information about a material transaction that occurred just after the auditor's report was issued is deemed to be reliable.

c.

An event occurs just after the auditor's report was issued that affects the entity's ability to continue as a going concern.

d.

Information that existed at the report date and may affect the report comes to the auditor's attention.

Choice "d" is correct. After issuing his or her report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless information that existed at the report date and may affect the report comes to the auditor's attention.

Choice "b" is incorrect. An auditor has no obligation to make continuing inquiries concerning transactions that occurred after the auditor's report was issued.

Choice "a" is incorrect. After issuing his or her report, an auditor has no obligation to make continuing inquiries concerning resolutions of contingent liabilities.

Choice "c" is incorrect. An auditor has no obligation to make continuing inquiries concerning events occurring after the auditor's report was issued, even if those events affect the entity's ability to continue as a going concern.

7

Which of the following circumstances most likely would require an auditor to apply an omitted procedure after the audit report issuance date?

a.

The engagement letter requires the procedure to be performed.

b.

The auditor's report is unsupported as a result of the omitted procedure.

c.

Generally accepted accounting principles are violated.

d.

The client has requested that the procedure be performed.

Choice "b" is correct. An auditor is likely to apply an omitted procedure after the report issuance date if the omitted procedure impairs the auditor's ability to support the previously issued opinion.

Choice "c" is incorrect. Generally accepted accounting principles (GAAP) relate to how transactions should be recorded and reported. When GAAP is violated, the auditor will render a qualified or adverse opinion, depending on materiality. Generally accepted auditing standards, not generally accepted accounting principles, discuss audit procedures.

Choice "d" is incorrect. The client's request for a procedure to be performed would not require the auditor to perform the procedure. The primary decision of when the auditor would be required to apply an omitted procedure is when the procedure impairs the auditor's ability to support the previously issued opinion.

Choice "a" is incorrect. While the engagement letter may specify procedures to be performed, if another audit procedure was adequate to compensate for the omitted audit procedure, then no further action would be necessary.

8

An auditor concludes that a substantive auditing procedure considered necessary during the prior period's audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure?

a.

The source documents needed to perform the omitted procedure are still available.

b.

The auditor's opinion on the prior period's financial statements was unmodified.

c.

There are no alternative procedures available to provide the same evidence as the omitted procedure.

d.

The omission of the procedure impairs the auditor's present ability to support the previously expressed opinion.

Choice "d" is correct. The factor most likely to cause the auditor to promptly apply the omitted procedure would be if the omission impairs the auditor's present ability to support the previously expressed opinion.

Choice "c" is incorrect. The auditor would first need to determine whether the omission of the procedure impairs the ability to support the previously expressed opinion. It is possible that other procedures already performed tended to compensate for the omitted procedure, and therefore no further action would be necessary.

Choice "a" is incorrect. The availability of the source documents needed to perform the procedure has little bearing on whether the auditor determines that it is necessary to perform the procedure.

Choice "b" is incorrect. The rendering of a clean opinion has little importance. The issue is "support of the previously expressed opinion," not what the opinion was.

9

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

a.

Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.

b.

Inquire about payroll checks that were recorded before the year-end but cashed after the year-end.

c.

Compare the latest available interim financial information with the financial statements being reported upon.

d.

Examine changes in the quoted market prices of investments purchased since the year-end.

Choice "c" is correct. In obtaining evidence about subsequent events, the auditor should examine the latest available interim financial information, and compare them with the financial statements under audit.

Choice "d" is incorrect. Changes in quoted market prices subsequent to year-end are to be expected, and would not provide information about subsequent events.

Choice "a" is incorrect. Applying analytical procedures to the details of the balance sheet accounts that were tested at interim dates is part of testing the year-end financial statements, not part of obtaining evidence about subsequent events.

Choice "b" is incorrect. Payroll checks that are recorded before year-end are not subsequent events, even if they are not cashed until after year-end.

10

An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was:

a.

Extended to subsequent events occurring through the later date.

b.

Extended to include all events occurring since the original report date.

c.

Limited to the specific event referenced.

d.

Limited to include only events occurring up to the date of the last subsequent event referenced.

 

Choice "c" is correct. When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor's report, but before issuance of the related financial statements, the auditor's responsibility for events occurring subsequent to the original report date is limited to the specific event referenced.

Choices "d", "a", and "b" are incorrect. The auditor takes responsibility for only the specific event noted in the dual dating and no other event occurring subsequent to the original report date.

11

On March 1, Green, CPA, expressed an unmodified opinion on the financial statements of Ajax Co. On July 1, Green's internal inspection program discovered that engagement personnel failed to observe Ajax's physical inventory. Green believes that this omission impairs Green's ability to support the unmodified opinion. If Ajax's creditors are currently relying on Green's opinion, Green should first:

a.

Request Ajax's management to communicate to its creditors that Green's opinion should not be relied on.

b.

Undertake to apply the alternative procedures that would provide a satisfactory basis for Green's opinion.

c.

Reissue Green's auditor's report with an emphasis-of-matter paragraph describing the departure from GAAS.

d.

Advise Ajax's board of directors to disclose this development in its next interim report.

Choice "b" is correct. In the event of omitted audit procedures, the auditor should first attempt to perform alternative procedures in order to ascertain whether the original opinion can be relied upon.

Choice "a" is incorrect. The auditor would only advise the client to notify creditors that the unmodified opinion cannot be relied upon if the auditor cannot become satisfied (by performing alternative procedures) as to the propriety of the original opinion.

Choice "c" is incorrect. The auditor may need to reissue the audit report if the auditor is unable to become satisfied by using alternative procedures; however, the opinion issued would be qualified or disclaimed, due to the scope limitation, and would not simply have an emphasis-of-matter paragraph added.

Choice "d" is incorrect. The auditor would only advise the client to disclose this development in its next interim report if the auditor cannot become satisfied (by performing alternative procedures) as to the propriety of the original opinion.

12

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

a.

Perform search for unrecorded liabilities.

b.

Send inquiry letter to client's legal counsel.

c.

Review detail and test significant travel and entertainment expenses.

d.

Review subsequent events.

Choice "c" is correct. The auditor may choose to perform detailed audit work during an interim period prior to the balance sheet date, especially for accounts that are reasonably predictable. If travel and entertainment expenses are budgeted and closely monitored, they may very well be predictable and subject to interim testing.

Choice "d" is incorrect. Subsequent events occur (by definition) after the balance sheet date, so it would not be possible to review them prior to the balance sheet date.

Choice "a" is incorrect. The search for unrecorded liabilities is a search for obligations that existed, but were not recorded, as of the balance sheet date. Therefore, it would not be possible to perform this search prior to the balance sheet date.

Choice "b" is incorrect. A letter of audit inquiry to the client's legal counsel relates to pending or threatened litigation matters that existed at the balance sheet date and for a period thereafter. Since the letter includes discussion of matters existing at the balance sheet date, it would not be possible to send this letter prior to the balance sheet date.

13

On March 15, Year 4, Kent, CPA, issued an unmodified opinion on a client's audited financial statements for the year ended December 31, Year 3. On May 4, Year 4, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unmodified opinion. If the stockholders are currently relying on the opinion, Kent should first:

a.

Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion.

b.

Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.

c.

Advise management to disclose to the stockholders that Kent's unmodified opinion should not be relied on.

d.

Reissue the auditor's report and add an emphasis-of-matter paragraph describing the departure from generally accepted auditing standards.

 

Choice "a" is correct. In the event of omitted audit procedures, the auditor should first attempt to perform alternative procedures in order to ascertain whether the original opinion can be relied upon.

Choice "c" is incorrect. The auditor would only advise the client to notify all stockholders and other financial statement users that the unmodified opinion cannot be relied upon if the auditor cannot become satisfied (with alternative procedures) as to the propriety of the original opinion.

Choice "d" is incorrect. The auditor may need to reissue the audit report if the auditor is unable to become satisfied using alternative procedures; the opinion issued should be qualified or disclaimed, due to the scope limitation.

Choice "b" is incorrect. Tests of controls are not appropriate alternative procedures.

14

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.

The entity sells a subsidiary that accounts for 35% of the entity's consolidated sales.

b.

A technological development occurs that affects the entity's ability to continue as a going concern.

c.

A lawsuit is resolved that is explained in a separate paragraph of the prior-year's auditor's report.

d.

New information is discovered concerning undisclosed related party transactions of the prior year.

Choice "d" is correct. If an auditor becomes aware of material information that existed at the date of the auditor's report, and which would have affected that report, the auditor needs to take appropriate action. Since related party transactions should be disclosed in the financial statements, it is likely that the auditor would need to make further inquiries to determine whether the lack of disclosure will affect the previously issued report.

Choice "c" is incorrect. Resolution of a lawsuit that was disclosed in the prior year's audit report would not be likely to affect the audit report, as auditors are not required to update their reports for events occurring after the fact.

Choice "b" is incorrect. A technological development that affects the entity's ability to continue as a going concern would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.

Choice "a" is incorrect. Sale of a subsidiary would not be likely to affect the previous year's audit report, as auditors are not required to update their reports for events occurring after the fact.

15

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

a.

Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.

b.

Recompute depreciation charges for plant assets sold for substantial gains since the year-end.

c.

Examine a sample of transactions that occurred since the year-end to verify the effectiveness of computer controls.

d.

Inquire of management whether there have been significant changes in working capital since the year-end.

Choice "d" is correct. In obtaining evidence about subsequent events, the auditor would most likely inquire of management whether there have been significant changes in working capital since year-end. Such changes could be indicative of a going concern problem, which would require financial statement disclosure.

Choice "c" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Reviewing a sample of transactions occurring after year-end to verify the effectiveness of computer controls would not be likely to provide information about subsequent events.

Choice "b" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Recomputing depreciation related to assets sold after year-end is not likely to provide information about subsequent events. Sales occurring after year-end are not considered to be subsequent events.

Choice "a" is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Control deficiencies do not fall within this definition, so reperforming tests of controls would not provide evidence about subsequent events.

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.

The discovery of information regarding a contingency that existed before the financial statements were issued.

b.

The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales.

c.

The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.

d.

A technological development that could affect the entity's future ability to continue as a going concern.

Choice "a" is correct. With respect to events occurring after the issuance of an auditor's report, the auditor is only responsible for information that existed at the audit report date.

Choice "d" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.

Choice "b" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.

Choice "c" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry.

17

Wilson, CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31, Year 1, financial statements on March 6, Year 2. A subsequent event requiring adjustment to the Year 1 financial statements occurred on April 10, Year 2. Wilson decides not to dual date the report and completes the extended audit procedures for subsequent events on April 24, Year 2. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated:

a.

Using dual dating.

b.

April 24, Year 2.

c.

March 6, Year 2.

d.

April 10, Year 2.

Choice "b" is correct. Adjustments or disclosures made after the original report date require the auditor to dual date or extend the date of the auditor's report. Since Wilson decided not to dual date the report, his report should be dated April 24, Year 2, the date on which sufficient appropriate audit evidence (including procedures related to subsequent events) was obtained.

Choice "c" is incorrect. If adjustment or disclosure of the financial statements are made after the original date of the auditor's report, the auditor may dual date or use a later date. Since Wilson elected not to dual date the report, Wilson's report should be dated as of April 24, Year 2, the date on which sufficient appropriate audit evidence (including procedures for subsequent events) was obtained.

Choice "d" is incorrect. Since the financial statements are adjusted, Wilson's report should be dated as of April 24, Year 2, the date when sufficient appropriate audit evidence (including procedures related to subsequent events) was obtained.

Choice "a" is incorrect. Wilson decided not to use dual dating.

18

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

a.

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

b.

Investigating personnel changes in the accounting department occurring after year-end.

c.

Comparing the financial statements being reported on with those of the prior period.

d.

Confirming a sample of material accounts receivable established after year-end.

Choice "a" is correct. An auditor would most likely inquire as to whether any unusual adjustments were made after year-end that would require adjustment to and/or disclosure in the year-end financial statements.

Choice "d" is incorrect. Obtaining evidence about A/R that were established after year-end would not provide the auditor with information about subsequent events, since any information about these A/R would not require adjustment to or disclosure in the prior year financial statements.

Choice "c" is incorrect. Comparing the financial statements being reported on with those of the prior period is not a very good source of subsequent event information.

Choice "b" is incorrect. Changes in accounting personnel at any time would probably not result in any subsequent event financial statement adjustment or disclosure.

19

An auditor is considering whether the omission of the confirmation of investments impairs the auditor's ability to support a previously expressed unmodified opinion. The auditor need notperform this omitted procedure if:

a.

The omission is documented in a communication with the audit committee.

b.

The results of alternative procedures that were performed compensate for the omission.

c.

The auditor's assessed level of detection risk is low.

d.

No individual investment is material to the financial statements taken as a whole.

Choice "b" is correct. If other audit procedures compensate for an omitted procedure, the auditor does not need to perform the omitted procedure.

Choice "c" is incorrect. If an auditor's assessed level of detection risk is low, this would provide a further reason to perform the omitted procedure or an alternative procedure to confirm the investment balance.

Choice "a" is incorrect. An auditor would still need to apply the omitted procedure (or alternative procedure) even if the omission is documented in a communication with the audit committee.

Choice "d" is incorrect. An auditor would need to perform the omitted procedure or an alternative procedure, as the aggregate amount of investments may be material to the financial statements taken as a whole.

20

An auditor concludes that a substantive auditing procedure considered necessary during the prior year's audit was omitted and there are persons currently relying on the auditor's report. The auditor most likely would promptly apply the omitted procedure if:

a.

The auditor's working papers will be subject to postissuance review in connection with a peer review program.

b.

A substantive approach to identified risks at the relevant assertion level was used.

c.

The omission of the procedure impairs the auditor's present ability to support the previously expressed opinion.

d.

The results of other procedures that were applied tend to compensate for the one omitted.

 

Choice "c" is correct. If the omitted audit procedures impair the auditor's ability to support the previously issued opinion, the auditor should promptly undertake to apply the omitted procedures (or alternative procedures).

Choice "b" is incorrect. The auditor's specific approach to identified risks at the relevant assertion level is not relevant in evaluating whether an omitted audit procedure should be applied. This determination should be based on whether the omission of the procedure impairs the auditor's ability to support the opinion.

Choice "a" is incorrect. Whether or not the working papers are subject to postissuance review in connection with a peer review program is not relevant in evaluating whether an omitted audit procedure should be applied. Sufficient evidence to support the opinion is necessary regardless of whether or not there will be a peer review.

Choice "d" is incorrect. If the results of other procedures that were applied tended to compensate for the one omitted, there would be adequate support for the audit opinion, and the omitted procedure would not need to be applied.

21

After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation?

a.

Require that the client notify financial statements users of the omitted procedures.

b.

Let the current report stand and correct material errors on the next audit report.

c.

No further action is necessary if the audit report can still be supported.

d.

Immediately notify known users of the omitted audit procedure.

Choice "c" is correct. The first step in such a situation would be to determine whether any other alternative steps may have been performed that would tend to compensate for the omitted procedures, thus allowing the audit report to stand as supported.

Choice "b" is incorrect. This step would not be acceptable, as the auditor would first have to determine whether there are alternative procedures that were performed that would still support the findings of the audit. If not, then the management and audit committee of the company would need to be notified.

Choice "d" is incorrect. Users are not immediately notified. The first step in such a situation would be to determine whether any other alternative steps may have been performed that would tend to compensate for the omitted procedures, thus allowing the audit report to stand as supported.

Choice "a" is incorrect. This step would only be performed if it was determined that no other alternative steps were performed that may support the audit report.

22

Subsequent to issuing a report on audited financial statements, a CPA discovers that the accounts receivable confirmation process omitted a number of accounts that are material, in the aggregate. Which of the following actions should the CPA take immediately?

a.

Withdraw the auditor's report from those persons currently relying on it.

b.

Bring the matter to the attention of the board of directors or audit committee.

c.

Perform alternative procedures to verify account balances.

d.

Discuss the potential financial statement adjustments with client management.

 

Choice "c" is correct. If an auditor omits a procedure, the auditor should first determine whether other audit procedures compensate for the omitted audit procedures. If so, no further action is necessary. If other procedures do not compensate for the omitted audit procedure and there are people relying on the report, the auditor should promptly apply the omitted procedure or perform alternative procedures.

Choice "b" is incorrect. The auditor would first need to apply the procedure or alternative procedure to determine the account balance. If the procedure indicated the account was materially misstated, then the auditor would bring the matter to the attention of the board of directors or audit committee.

Choice "a" is incorrect. The auditor would first need to apply the procedure or alternative procedure to determine the account balance. The auditor would withdraw the auditor's report if the client refuses to adjust the financial statements.

Choice "d" is incorrect. The auditor would first need to apply the procedure or alternative procedure to determine the account balance. If adjustments were necessary, the auditor would then talk to the client about the potential adjustments.

23

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 subsidiary is sold that accounts for 25% of the entity's consolidated net income.

b.

An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.

c.

A contingency is resolved that had been disclosed in the audited financial statements.

d.

New information is discovered concerning undisclosed lease transactions of the audited period.

Choice "d" is correct. The question addresses the subsequent discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements. An example is new information discovered about undisclosed lease transactions of the audited period. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.

Choice "b" is incorrect. The natural disaster is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate.

Choice "c" is incorrect. The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate.

Choice "a" is incorrect. Sale of a subsidiary occurring after the date of the auditor's report is an example of a subsequent event that the auditor has no obligation to investigate.

24

Which of the following statements is not true regarding the auditor's responsibility for subsequent events?

a.

The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.

b.

The auditor has an active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted.

c.

The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report.

d.

The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.

Choice "b" is correct. The auditor has no active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted. The auditor's active responsibility stops on the date of the auditor's report.

Choice "c" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report.

Choice "a" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.

Choice "d" is incorrect. The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.

25

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may:

a.

Have been recorded based on year-end tests for asset obsolescence.

b.

Have been recorded based on preliminary accounting estimates.

c.

Require disclosure to keep the financial statements from being misleading.

d.

Require adjustments to the financial statements as of the year end.

Choice "c" is correct. Conditions that did not exist at year end but arose after year end are Type 2 (nonrecognized) subsequent events that must be disclosed to keep the financial statements from being misleading.

Choice "d" is incorrect. An adjustment would not be required as the conditions did not exist at year end. Type 1 (recognized) subsequent events require adjustment to the financial statement.

Choice "b" is incorrect. An adjustment based on preliminary accounting estimates would not have been recorded as the conditions did not exist at year end.

Choice "a" is incorrect. This is not a subsequent event as the recording of obsolescence at year end is based on the results of the performance of customary asset valuation tests - conditions that existed at year end.

26

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, Year 1?

a.

Proceeds from a capital stock issuance in Year 2 which was being approved by the board of directors in Year 1.

b.

Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2.

c.

Uninsured loss of inventories purchased in Year 1 as a result of a flood in Year 2.

d.

Settlement of litigation in Year 2 over an event that occurred in Year 2.

Choice "b" is correct. A trade receivable existing at the date of the financial statements that subsequently becomes uncollectible because of bankruptcy of the customer requires an adjustment to the financial statements.

Choice "c" is incorrect. Significant business events occurring subsequent to the date of financial statements, such as a loss resulting from a flood, require no adjustment to the statements, but may require significant additional disclosure.

Choice "d" is incorrect. Settlement in Year 2 of litigation related to a Year 2 event would not require adjustment to the Year 1 financial statements, but would require disclosure in the financial statements.

Choice "a" is incorrect. Proceeds from a capital stock issuance in Year 2 would not require adjustment to the Year 1 financial statements, but would require disclosure in the financial statements.

V

27

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless:

a.

Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements.

b.

Information, which existed at the report date and may affect the report, comes to the auditor's attention.

c.

Information about an event that occurred after the date of the auditor's report comes to the auditor's attention.

d.

Management of the entity requests the auditor to reissue the auditor's report.

Choice "b" is correct. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless information, which existed at the report date and may affect the report, comes to the auditor's attention. In this case the auditor would perform procedures to determine if the information affects the report and is important to the external users.

Choice "d" is incorrect. The auditor has no obligation to perform other procedures if management of the entity requests the auditor to reissue the auditor's report (if no significant changes have occurred since the report date).

Choice "c" is incorrect. The auditor has no obligation to perform other procedures if information about an event that occurred after the date of the auditor's report comes to the auditor's attention (and the auditor has not been asked to reissue the report).

Choice "a" is incorrect. Most contingencies are eventually resolved; however, such resolution does not require the auditor to perform other procedures.

28

As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for:

a.

Only the subsequent events that occurred through August 13.

b.

Only the specific subsequent event disclosed by the entity.

c.

All subsequent events that occurred through August 27.

d.

All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity.

Choice "c" is correct. If the auditor chooses to use the later date for the report, this extends the auditor's responsibility for all subsequent events to this later date.

Choice "b" is incorrect. Dating the report August 27 means that the auditor is taking responsibility for all subsequent events through August 27.

Choice "d" is incorrect. Dating the report August 27 means that the auditor is taking responsibility for all subsequent events through August 27. If the auditor wishes to be responsible for all subsequent events through August 13 and only the one specific event after that date, the auditor would need to dual date the report.

Choice "a" is incorrect. Dating the report August 27 means that the auditor is taking responsibility for all subsequent events through August 27.

29

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

a.

Recompute depreciation charges for plant assets sold after year-end.

b.

Investigate changes in long-term debt occurring after year-end.

c.

Inquire about payroll checks that were recorded before year-end but cashed after year-end.

d.

Determine that changes in employee pay rates after year-end were properly authorized.

Choice "b" is correct. Long-term debt that matures within one year is reported as a current liability on the balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether such debt is appropriately classified on the balance sheet.

Choice "d" is incorrect. Subsequent changes in employee pay rates are not relevant to the current year's audit report.

Choice "a" is incorrect. Depreciation charges for assets sold in the subsequent period are not relevant to the current year's audit report.

Choice "c" is incorrect. Payroll checks that were recorded close to (but before) year-end often are not cashed until the subsequent period. The auditor would not be particularly concerned about this.

30

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

a.

Inquire about payroll checks that were recorded before year-end but cashed after year-end.

b.

Investigate changes in long-term debt occurring after year-end.

c.

Determine that changes in employee pay rates after year-end were properly authorized.

d.

Recompute depreciation charges for plant assets sold after year-end.

Choice "b" is correct. In obtaining evidence about subsequent events, an auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year. In addition, subsequent sales of LT debt require footnote disclosure.

Choice "c" is incorrect. Changes in employee pay rates occurring after year-end would have no effect on the year under audit.

Choice "d" is incorrect. Plant assets sold after the end of the year (that were not related to a current year transaction such as a discontinued operation) have no impact on the current year's financial statements.

Choice "a" is incorrect. Following up on payroll checks that were cashed after year-end is generally not the most effective way to audit accrued payroll and would provide little evidence about subsequent events.

31

Which of the following events occurring after the issuance of the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

a.

The auditor discovers that the entity intends to present comparative financial statements in subsequent years.

b.

Litigation that had been disclosed in the financial statements is resolved.

c.

A subsidiary that accounts for 30% of the entity's consolidated net revenue is sold.

d.

New information regarding significant unrecorded transactions from the year under audit is discovered.

Choice "d" is correct. The question addresses subsequent discovery of facts that may have existed at the balance sheet date. Such events will often require an adjustment to the financial statements. An example is new information discovered regarding significant unrecorded transactions from the year under audit. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.

Choice "a" is incorrect. An auditor is unlikely to make further inquiries about previously issued financial statements when the auditor discovers that the entity intends to present comparative financial statements in subsequent years. This information does not affect the current auditor's report.

Choice "b" is incorrect. The resolution of a disclosed contingency is an example of a subsequent event occurring after the date of the auditor's report that the auditor has no obligation to investigate. The resolution did not exist at the date of the audit report.

Choice "c" is incorrect. The sale of a subsidiary occurring after the date of the auditor's report is an example of a subsequent event that the auditor has no obligation to investigate. The sale of the subsidiary did not exist at the date of the auditor's report.

32

Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

a.

Issue revised pro forma financial statements taking into consideration the newly discovered information.

b.

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

c.

Give public notice that the auditor is no longer associated with financial statements.

d.

Request that management disclose the newly discovered information by issuing revised financial statements.

Choice "b" is correct. When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report, the auditor should determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Choice "d" is incorrect. The auditor would request that management disclose the newly discovered information only after determining whether there are persons relying on the information.

Choice "a" is incorrect. Management, not the auditor, may issue revised financial statements.

Choice "c" is incorrect. The auditor would give public notice that he/she is no longer associated with the FS only after determining that there are persons relying on the information and only if the client refuses to issue revised FS.

33

An audit report is dated February 1, Year 2. Which of the following events, occurring on February 12, Year 2, is most likely to cause the auditor to request that the financial statements be revised?

a.

The auditor becomes aware that a material receivable included in the Year 1 financial statements related to a sale that occurred in Year 2.

b.

The auditor becomes aware that the staff accountant did not properly complete a crucial step in the audit program.

c.

The auditor becomes aware that a key member of management is resigning.

d.

The auditor becomes aware that a material purchase included in the Year 1 financial statements was not paid for until Year 2.

Choice "a" is correct. If an auditor becomes aware of material information existing at the date of the audit report, the auditor should advise the client to issue revised financial statements. In this case, since the sale did not occur until Year 2, there should have been no receivable recorded in Year 1.

Choice "b" is incorrect. The fact that an audit procedure was omitted does not necessarily mean that the financial statements are misstated. Perhaps another procedure compensated for the omission, or perhaps if the auditor applies this or an alternative procedure, he or she will still find that the financial statements are fairly stated.

Choice "c" is incorrect. Personnel changes do not typically require revision of the financial statements.

Choice "d" is incorrect. Under the accrual basis of accounting, a purchase made in Year 1 should be included in the Year 1 financial statements regardless of when payment is made.

34