CHAPTER 19: Completing the Audit and Postaudit Responsibilities QUESTIONS True/False REQUIRED: For each of the following items, indicate whether it is (T) True or (F) False. For those marked “False,” identify the error(s) and indicate the change or changes that are needed to make the statement true. 1. In the phrase subsequent events period, the word subsequent relates to the report date. 2. The auditor has no responsibility to search for items in the subsequent events period that would have an impact on the financial statements. 3. When material, type 1 subsequent events require disclosure and type 2 subsequent events require adjustment. 4. Failure to record or properly disclose subsequent events in the financial statements will require the auditor to express either a qualified opinion, or a disclaimer of opinion, depending on materiality. 5. The auditor’s reading of the minutes of meetings of stockholders, the board of directors, and its subcommittees, should be documented in the working papers. CHAPTER 20: Attest and Assurance Services, and Related Reports QUESTIONS True/False REQUIRED: For each of the following items, indicate whether it is (T) True or (F) False. For those marked “False,” identify the error(s) and indicate the change or changes that are needed to make the statement true. 1. Attestation services are independent professional services that improve the quality of information or its context, for decision-makers. 2. Independence is embedded in the definition of assurance services. 3. As decision-makers place more reliance in IT to support their decision-making needs, they have lesser needs for assurance on systems and controls. 4. Assurance services focus on those who make decisions based on information and use the CPA’s output to make decisions. 5. SSARS stands for Statements of Standards for Accounting and Revenue Services. Multiple Choice REQUIRED: Indicate the best answer choice for each of the following. 1. Which of the following would most likely be audited in conjunction with the examination of the client's interest notes payable? a. Interest income. b. Interest expense. c. Amortization of goodwill. d. Royalty revenue. 2. The main purpose of management representations is to a. Shift responsibility for financial statements from the management to the auditor. b. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform. c. Provide management a place to make assertions about the quantity and valuation of the physical inventory. d. Impress on management its ultimate responsibility for the financial statements and disclosures. 3. Which of these substantive procedures or sources is not obtain evidence about contingencies? a. Scan expense accounts for credit entries. b. Obtain a letter from the client's attorney. c. Read the minutes of the board of directors' meetings. d. Examine terms of sale in sales contracts. 4. A Type I subsequent event involves subsequent information about a condition that existed at the balance sheet date. Subsequent knowledge of which of the following would company 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 litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements? d. Storm damage of $1 million to the company's buildings on March 1. 5. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2006. She completed the audit fieldwork on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and shenow needs to dual date the report on the company's financial statements before sending it to the company. Which of the following is the proper form? a. December 31, 2006, except as to Note X, which is dated January 30, 2007. b. January 30, 2007, except as to note X, which is dated February 5, 2007. c. December 31, 2006, except as to Note X, which is dated February 5, 2007. d. February 5, 2007, except for completion of fieldwork for which the date is January 30, 2007. 6. In connection with a company's filing a registration statement under the 1933 Securities Act, auditors have a responsibility to perform substantive procedures to find subsequent events a. The year-a. end balance sheet date. b. The audit report date. c. The date the registration statement and audit reports are delivered to the U.S. Securities and Exchange Commission. d. The “effective date” of the registration statement, when the securities can be offered for sale. 7. The Auditing Standards regarding “subsequent discovery of facts that existed at the balance sheet date” refers to knowledge obtained after a. The date the audit reports are delivered to the client. b. The audit report date. c. The company's year-end balance sheet date. d. The date interim audit work was complete. 8. Which of the following is not required by generally accepted Auditing Standards? a. Management representations. b. Attorney letter. c. Management letter. d. Engagement letter. 9. Which of these persons generally does not participate in writing the management letter (client advisory comments)? a. Client's outside attorneys. b. Client's accounting and production managers. c. Audit firm's audit team on the engagement. d. and tax experts. 10. Which of the following is ordinarily performed last in the 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 management representations. 11. A CPA found that the company has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the CPA would choose between which reporting options? a. Unqualified opinion or a. disclaimer of opinion. b. Unqualified opinion or qualified opinion. c. Emphasis paragraph with unqualified opinion or an adverse opinion. d. Qualified opinion or adverse opinion. 12. An auditor determined that the company is suffering financial difficulty and the goingconcern status is seriously in doubt. Even though the company has placed adequate disclosures in the financial statements, the auditor must choose between which of the following audit report alternatives? a. Unqualified report with a going-concern explanatory paragraph or disclaimer of opinion. b. Standard unqualified report or a disclaimer of opinion. c. Qualified opinion or adverse opinion. d. Standard unqualified report or adverse opinion. 13. A company accomplished an early extinguishment of debt, and the auditors believe that literal application of SFAS No. cause recognition of a loss that would materially distort the financial statements and cause them to be misleading. Given these facts, the auditor would probably choose which reporting option? a. Explain the situation and give an adverse opinion. b. Explain the situation and give a disclaimer of opinion. c. Explain the situation and give an unqualified opinion, relying on Rule 203 of the AICPA Code of Professional Conduct. d. Give the standard unqualified audit report. 14. Which of these situations would require an auditor to append an explanatory paragraph about consistency to an otherwise unqualified audit report? a. Company changed its estimated allowance for uncollectible accounts receivable. b. Company corrected a prior mistake in accounting for interest capitalization. c. Company sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year. d. Company changed its inventory costing method from FIFO to LIFO. 15. Wolfe became the new auditor for Royal Corporation, succeeding Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements should write in his report an explanation about another auditor having audited the prior year a. Only if Mason's opinion last a. year was qualified. b. Describing the prior audit and the opinion but not naming Mason as the predecessor auditor. c. Describing the audit but not revealing the type of opinion Mason gave. d. Describing the audit and the opinion and naming Mason as the predecessor auditor. 16. When other independent auditors are involved in the current audit of parts of the company's business, the principal auditor can write an audit report that (two answers) a. Mentions the other auditor, describes the extent of the other auditor's work, and gives an unqualified opinion. b. Does not mention the other auditor and gives an unqualified opinion in a standard unqualified report c. Places primary responsibility for the audit report on the other auditors. d. Names the other auditors, describes their work, and presents only the principal auditor's report. 17. An “emphasis-of-a-matter” paragraph inserted in a standard audit report causes the report to be characterized as a(n) a. Unqualified opinion report. b. Divided responsibility report. c. Adverse opinion report. d. Disclaimer of opinion. 18. Under which of the following conditions can a disclaimer of opinion never be given? a. Going-concern problems are highly material and significant. b. The company does not let the auditor have access to evidence about important accounts. c. The auditor owns stock in the company. d. The auditor has found that the company has used the NIFO (next-in, first-out) inventory costing method. 19. Where will you find an auditor's own responsibility for the opinion on financial statements? a. Stated explicitly in the introductory paragraph of the standard unqualified report. b. Unstated but understood in the introductory paragraph of standard unqualified report. c. Stated explicitly in the opinion paragraph of the standard unqualified report. d. Stated explicitly in the scope paragraph of the standard unqualified report. 20. Company A hired Sampson & Delila, CPAs, to audit the financial statements of Company B and deliver the audit report to Megabank. Which is the client? a. Megabank. b. Sampson & Delila. c. Company A. d. Company B.