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Flashcards in A5-4 Deck (21)
1

Which of the following should be included as a written representation from management?

a.

The belief that misstatements identified by the auditor and not corrected are immaterial.

b.

The belief that misstatements identified by the auditor and corrected are material.

c.

The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.

d.

The belief that the financial statements are completely accurate in all respects.

Choice "a" is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

Choice "b" is incorrect. If the misstatements have been corrected, there is no need for management to make representations regarding their materiality.

Choice "c" is incorrect. Management (and not the auditor) is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.

Choice "d" is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects.

2

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage is most likely from a:

a.

Report on internal control.

b.

Special report.

c.

Letter for underwriters.

d.

Management representation letter.

Choice "d" is correct. The statement concerning disclosure of non-compliance with laws and regulations would appear in the management representation letter.

Choice "a" is incorrect. As a representation of management, the statement concerning disclosure of non-compliance with laws and regulations would not appear in the auditor's report on internal control.

Choice "b" is incorrect. As a representation of management, the statement regarding disclosure of non-compliance with laws and regulations would not appear in the auditor's special report.

Choice "c" is incorrect. A statement regarding disclosure of non-compliance with laws and regulations would not appear in an auditor's letter for underwriters.

3

Which of the following matters would an auditor most likely include in a management representation letter?

a.

Plans to acquire or merge with other entities in the subsequent year.

b.

Management's acknowledgment of its responsibility for the detection of employee fraud.

c.

Communications with those charged with governance concerning weaknesses in internal control.

d.

The reasonableness of significant assumptions used in making accounting estimates.

Choice "d" is correct. Specific written representations obtained by the auditor should include a statement that the significant assumptions used by management in making accounting estimates are reasonable.

Choice "c" is incorrect. Communications with those charged with governance are generally not included in the management representation letter, whereas communications from regulatory agencies regarding noncompliance with, or deficiencies in, financial reporting practices would be included.

Choice "a" is incorrect. Management's subsequent plans need not be included in the management representation letter, unless they will affect the carrying value or classification of assets and liabilities.

Choice "b" is incorrect. Management acknowledges its responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud, but does not acknowledge its responsibility to detect fraud.

4

To which of the following matters would materiality limits not apply in obtaining written management representations?

a.

The disclosure of compensating balance arrangements involving related parties.

b.

Losses from purchase commitments at prices in excess of market value.

c.

The availability of minutes of stockholders' and directors' meetings.

d.

Reductions of obsolete inventory to net realizable value.

Choice "c" is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.

Choice "b" is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits.

Choice "a" is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits.

Choice "d" is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.

5

The date of the management representation letter should coincide with the date of the:

a.

Latest interim financial information.

b.

Auditor's report.

c.

Latest related party transaction.

d.

Balance sheet.

Choice "b" is correct. Because the auditor is concerned with events occurring through the date of the audit report that may require adjustment to or disclosure in the financial statements, the management representation letter should be dated as of the date of the auditor's report.

Choice "d" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is generally after the balance sheet date.

Choice "a" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the date of the latest interim financial information.

Choice "c" is incorrect. The management representation letter is dated as of the date of the auditor's report, which is unrelated to the dates of related party transactions.

6

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a (an):

a.

Report on compliance with laws and regulations.

b.

Attestation report on internal control.

c.

Client engagement letter.

d.

Management representation letter.

Choice "d" is correct. The statement above is a written representation obtained by the auditor from management.

Choice "c" is incorrect. A client engagement letter is used to document the understanding between the client and the auditor. The letter is generally sent from the auditor to the client, although the client may be requested to sign it. The statement, "We disclosed to you all known instances of non-compliance or suspected non-compliance..." should come from management. It would not be appropriate to include this in an engagement letter, which is often sent before the year has even ended.

Choice "a" is incorrect. An auditor would prepare a report on compliance with laws and regulations. The statement, "We disclosed to you all known instances of non-compliance or suspected non-compliance..." should come from management.

Choice "b" is incorrect. An auditor would prepare an attestation report on internal control. The statement, "We disclosed to you all known instances of non-compliance or suspected non-compliance..." should come from management.

7

Which of the following statements might be included among additional written client representations obtained by the auditor?

a.

Sufficient audit evidence has been made available to permit the issuance of an unmodified opinion.

b.

Management acknowledges that there are no material weaknesses in internal control.

c.

Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

d.

Management acknowledges responsibility for illegal actions committed by employees.

Choice "c" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor might include acknowledgment that all compensating balances or other restrictions on cash have been disclosed.

Choice "d" is incorrect. Management acknowledges responsibility for the fair presentation of the financial statements, not for illegal actions committed by employees.

Choice "a" is incorrect. The auditor must decide whether there is sufficient audit evidence available to permit the issuance of an unmodified opinion, and does not request management confirmation of this decision.

Choice "b" is incorrect. Management is responsible for the design and maintenance of internal control of the company, but it is the auditor who must determine whether material weaknesses in internal control exist.

8

Which of the following factors most likely would cause an auditor to question the integrity of management?

a.

Weaknesses in internal control reported to the audit committee are not corrected by management.

b.

Managerial decisions are dominated by one person who is also a stockholder.

c.

Management has an aggressive attitude toward financial reporting and meeting profit goals.

d.

Audit tests detect material fraud that was known to management, but not disclosed to the auditor.

Choice "d" is correct. Management is required to disclose all material matters to the independent auditor, including information concerning material fraud. This disclosure is so important that it is included in writing, in the management representation letter. Failure of management to disclose material fraud to the auditor would cause the auditor to question management's integrity and perhaps even to withdraw from the engagement.

Choice "c" is incorrect. While management's aggressive attitude certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be both aggressive and ethical.

Choice "b" is incorrect. While the domination of management by a stockholder certainly constitutes a fraud risk, this alone would not necessarily cause the auditor to question management's integrity. It is possible for management to be an ethical shareholder.

Choice "a" is incorrect. Failure to correct a known weakness in internal control may be a conscious decision based on the cost and benefit involved with making the correction. Such decisions do not imply that management lacks integrity.

9

Which of the following expressions most likely would be included in a management representation letter?

a.

Certain computer files and other required audit evidence may exist only for a short period of time and only in computer-readable form.

b.

There are no significant deficiencies in internal control identified during the prior-year's audit of which those charged with governance are unaware.

c.

We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege.

d.

No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

Choice "d" is correct. It is appropriate for the representation letter to contain a statement regarding subsequent events.

Choice "b" is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. The communication of significant deficiencies in internal control does not fall within these categories.

Choice "c" is incorrect. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events. A waiver of attorney-client privilege does not fall within these categories.

Choice "a" is incorrect. While this may be an accurate statement, it is not something that would be included in the management representation letter. The representation letter typically includes information in four categories: financial statements; completeness; recognition, measurement, and disclosure; and subsequent events.

10

Which of the following matters most likely would be included in a management representation letter?

a.

An assessment of the risk factors concerning the misappropriation of assets.

b.

An evaluation of the litigation that has been filed against the entity.

c.

A statement that all material internal control weaknesses have been corrected.

d.

A statement that the effects of all known or possible litigation and claims have been accounted for and disclosed.

Choice "d" is correct. The management representation letter should disclose that the effects of all known or possible litigation and claims have been accounted for and disclosed in accordance with U.S. GAAP.

Choice "a" is incorrect. As part of planning the audit, the auditor must assess the risk that misappropriation of assets may occur, and may cause a material misstatement in the financial statements. While management may also assess this risk for its own purposes, the auditor would not be able to rely on management's assessment, and therefore would not typically request a representation regarding this matter.

Choice "b" is incorrect. The detailed evaluation of the litigation is not included in the management representation letter.

Choice "c" is incorrect. The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.

11

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

a.

"We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities."

b.

"No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."

c.

"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

d.

"There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."

Choice "c" is correct. The sufficiency of audit evidence and the type of opinion to be rendered are determined by the auditor, who applies professional judgment in making such determinations. Management representations are not necessary for the auditor to make such judgments, but rather would be used to confirm representations given to the auditor regarding the financial statements, completeness of information, recognition, measurement, and disclosure, and subsequent events.

Choice "d" is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that there are no unasserted claims or assessments that the entity's lawyer has advised are probable of assertion and must be disclosed.

Choice "a" is incorrect. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that management has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

Choice "b" is incorrect. The management representation letter should include information on subsequent events, and will generally state that no events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements.

12

To which of the following matters would materiality limits not apply when obtaining written client representations?

a.

Instances of fraud involving management.

b.

Disclosure of line-of-credit arrangements.

c.

Violations of state labor regulations.

d.

Information about related party transactions.

Choice "a" is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that "we have no knowledge of fraud or suspected fraud involving management" (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management.

Choice "c" is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations "whose effects should be considered for financial statement disclosure"−and only material effects would typically be considered for disclosure.

Choice "b" is incorrect. Since GAAP requires disclosure of material line-of-credit arrangements, materiality limits do apply to representations about such matters.

Choice "d" is incorrect. Since GAAP requires disclosure of material related party transactions, materiality limits do apply to representations about such matters.

13

Which of the following management roles would typically be acknowledged in a management representation letter?

a.

Management's knowledge of fraud is communicated to the audit committee.

b.

Management communicates its views on ethical behavior to its employees.

c.

Management has the responsibility for the design of controls to detect fraud.

d.

Management's compensation is contingent upon operating results.

Choice "c" is correct. Management acknowledges its responsibility for the design of controls to detect and prevent fraud in its management representation letter. 

Choice "b" is incorrect. The auditor should inquire of management how it communicates its views on ethical behavior to employees as part of obtaining an understanding of the design of the entity's internal control. This matter is not typically included in the management representation letter.

Choice "a" is incorrect. The management representation letter is concerned with representations made by management to the auditors, not representations made by management to the audit committee.

Choice "d" is incorrect. This would not be communicated in a management letter. This is a risk factor associated with fraudulent financial reporting.

14

A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:

a.

Settle an outstanding lawsuit for an amount less than the accrued loss contingency.

b.

Terminate an employee pension plan.

c.

Discontinue a line of business.

d.

Make a public offering of its common stock.

Choice "c" is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as "held for sale" would be reported separately in the income statement under "discontinued operations."

Choice "b" is incorrect. A client's plan to terminate an employee pension plan would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice "d" is incorrect. A client's plans to make a public offering of its common stock would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice "a" is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.

15

A limitation on the scope of an auditor's examination sufficient to preclude an unmodified opinion will always result when management:

a.

Prevents the auditor from reviewing the audit documentation of the predecessor auditor.

b.

Refuses to furnish a management representation letter to the auditor.

c.

Engages the auditor after the year-end physical inventory count is completed.

d.

Fails to correct a material internal control weakness that had been identified during the prior year's audit.

Choice "b" is correct. Management's refusal to furnish a written representation letter constitutes a limitation on the scope sufficient to preclude an unmodified opinion.

Choice "c" is incorrect. Engaging the auditor after the year-end physical count is completed need not preclude an unmodified opinion if the auditor can apply satisfactory alternative audit procedures.

Choice "d" is incorrect. Failure to correct a material internal accounting control weakness that had been identified during the prior year's audit need not preclude an unmodified opinion, although it may require the auditor to apply extended auditing procedures.

Choice "a" is incorrect. Inability to review the predecessor's prior year audit documentation may cause the successor auditor more work but need not preclude an unmodified opinion in the current year.

16

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?

a.

Disclosure of compensating balance arrangements involving restrictions on cash balances.

b.

Fraud involving employees with significant roles in the internal control structure.

c.

Assumptions used in accounting estimates.

d.

The absence of errors and unrecorded transactions in the financial statements.

Choice "b" is correct. When obtaining specific written client representations, an auditor would not apply materiality limits to fraud involving employees with significant roles in the internal control structure, because even fraud that causes an immaterial effect on the financial statements may have serious implications with respect to the integrity of the employees involved.

Choice "a" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to disclosure of compensating balance arrangements involving restrictions on cash balances, because immaterial amounts need not be considered.

Choice "c" is incorrect. An auditor would apply materiality limits when determining assumptions that must be disclosed regarding accounting estimates. Specifically, all material assumptions that are used in accounting estimates must be disclosed, while all insignificant assumptions need not be disclosed. 

Choice "d" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to the absence of errors and unrecorded transactions in the financial statements, because immaterial amounts need not be considered.

17

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage is most likely from a:

a.

Management representation letter.

b.

Letter for an underwriter.

c.

Special report.

d.

Report on internal controls.

Choice "a" is correct. This information will be disclosed in a management (client) representation letter.

Choice "c" is incorrect. A passage regarding regarding disclosure of non-compliance with laws and regulations generally will not be found in a special report.

Choice "b" is incorrect. A passage regarding regarding disclosure of non-compliance with laws and regulations generally will not be found in a letter for an underwriter (i.e., a comfort letter).

Choice "d" is incorrect. A passage regarding regarding disclosure of non-compliance with laws and regulations generally will not be found in a report on internal controls.

18

To which of the following matters would materiality limits not apply when obtaining written client representations?

a.

Fraud involving management.

b.

Losses from sales commitments.

c.

Unasserted claims and assessments.

d.

Noncompliance with contractual agreements.

Choice "a" is correct. Materiality limits would not apply when obtaining written client representations regarding irregularities involving management, because even immaterial instances of fraud may have serious implications with respect to management's integrity.

Choices "b", "c", and "d" are incorrect. An auditor would apply materiality limits to matters that might affect recognition, measurement, and disclosure in the financial statements, including losses from sales commitments, unasserted claims and assessments, and noncompliance with contractual agreements.

19

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.

The possibility of a misunderstanding concerning management's responsibility for the financial statements.

c.

The scope of an auditor's procedures concerning related party transactions and subsequent events.

d.

An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on.

Choice "b" is correct. A primary purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management's responsibility for the financial statements. The first representation made in the letter states "we have fulfilled our responsibilities, as set out by the audit engagement dated [xxx], for the preparation and fair presentation of the financial statements in accordance with U.S. GAAP."

Choice "a" is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk.

Choice "d" is incorrect. The management letter is important audit evidence but it does not reduce the auditor's responsibility to detect material misstatements.

Choice "c" is incorrect. The management letter is important audit evidence but it does not reduce the scope of an auditor's procedures concerning related party transactions and subsequent events (or any other generally accepted audit procedure).

20

Management representations should be obtained about all of the following, except:

a.

The absence of unrecorded transactions.

b.

Instances of immaterial fraud involving employees who have significant roles in internal control.

c.

Management's consultation with other accountants.

d.

Uncorrected misstatements identified by the auditor

Choice "c" is correct. The auditor might discuss with those charged with governance management's consultation with other accountants, but representations about such consultation are not required.

Choices "d", "a", and "b" are incorrect. Management representations should be obtained about uncorrected misstatements identified by the auditor, the absence of unrecorded transactions, and instances of immaterial fraud involving employees who have significant roles in internal control. (Immaterial fraud involving either management or employees who have significant roles in internal control must be included; for other employees, only material fraud would be included in the representation letter.)

21

Which of the following matters is most likely to be included in a management representation letter as a specific representation?

a.

The competency and objectivity of the internal audit department.

b.

Information concerning fraud by the CFO.

c.

Reason for a significant increase in revenue over the prior year.

d.

Length of a material contract with a new customer.

Choice "b" is correct. The management representation letter should disclose knowledge of actual fraud or suspected fraud impacting the firm involving: members of management, employees that have a primary role in the firm's internal controls, and other individuals, especially when the fraud has a material impact on the reported financial statements.

Choice "d" is incorrect. The management representation letter is not a place to disclose the length of a material contract with a customer. This information would be documented by the auditor in the audit workpapers and disclosed in the financial statement footnotes.

Choice "c" is incorrect.  The reasons for the increase in revenue over the prior year would be documented by the auditor in the audit workpapers and disclosed in the Management, Discussion, and Analysis section of the firm's annual report.

Choice "a" is incorrect. The auditor is required to assess the competency and objectivity of the internal audit department if using the internal auditors during the audit process. However, management does not typically make any representation about the competency and objectivity of the internal auditors.