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Testbank
to accompany
Modern Auditing and
Assurance Services 6e
By
Philomena Leung, Paul Coram, Barry J. Cooper
and Peter Richardson
Prepared by
Jenny James
© John Wiley & Sons Australia, Ltd 2015
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Chapter 18: Completing the audit
Chapter 18:
Completing the audit
Multiple-choice questions
1. Financial statements are usually prepared on the going concern basis. The auditor is required
by ASA 570 (ISA 570) to assess the risk of going concern problems at which stage of the
audit?
a. During the final review.
b. The planning stage.
c. The planning stage and again during the final review.
d. ASA 570 (ISA 570) does not require the assessment of the risk of going concern
problems, this is left to the directors.
The correct answer is c.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
2. In working with the minutes of meetings of shareholders, those charged with governance, and
their subcommittees, the auditor should:
a.
read the minutes of all important meetings.
b.
read the minutes of a sample of meetings.
c.
read the minutes of all meetings.
d.
read the minutes of AGMs.
The correct answer is c.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
3. Which of these is among the characteristics of the procedures performed in completing the
audit?
a. They involve many subjective judgements by the auditor.
b. They do not relate to specific transaction cycles or accounts.
c. They are usually performed by audit managers or seniors.
d. All of the above are characteristics of the procedures performed in completing the audit.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
4. The auditor relies on the management representation letter to:
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Testbank to accompany Modern Auditing and Assurance Services 6e
a.
b.
c.
d.
guarantee the absence of management fraud.
confirm written representations given to the auditor.
document the continuing materiality of management representations.
reduce the possibility of misunderstanding concerning management’s representations.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
5. ASA 502.2 Audit Evidence – Specific Considerations for Litigation and Claims states that the
auditor shall obtain sufficient appropriate audit evidence regarding:
a. the completeness of litigation and claims involving the entity.
b. the probability of any revenue or expense arising from legal matters.
c. the adequacy of the legal representation of the entity.
d. all of the above.
The correct answer is a.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
6. Where an event occurring after the end of the reporting period provides new information that
does not relate to conditions existing at year end and, if its non-disclosure has the potential to
adversely affect decisions made by users of the financial statements:
a. it is required to be disclosed in the notes to the accounts.
b. it is an adjusting event.
c. it is a non-adjusting event.
d. a. and c..
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
7. The management representation letter will not normally be:
a. prepared on the client’s stationery.
b. addressed to the auditor.
c. dated as of the date of the auditor’s report.
d. tabled at the annual general meeting of the firm.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
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Chapter 18: Completing the audit
8. Analytical procedures are used in the overall review for all of these reasons except:
a. to identify contingent liabilities.
b. to corroborate conclusions formed during the audit.
c. to gain assurance that the company will remain a going concern.
d. to assist in arriving at the overall conclusion that the financial information is consistent
with the knowledge of the business.
The correct answer is a.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
9. In regard to identifying and evaluating subsequent events, ASA560.10 (ISA 560) specifies
that the auditor make inquiries of management. Which of the following is not an example of
a specific inquiry?
a. Whether new commitments, borrowings or guarantees have been entered into.
b. Whether sales of assets have occurred or are planned.
c. Whether any unusual accounting adjustments are being contemplated.
d. The current status of items previously accounted for on the basis of preliminary or
inconclusive data.
The correct answer is c.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
10. If the auditor discovers that management intends to liquidate the entity:
a. it is irrelevant if they did not intend to liquidate the entity at reporting date.
b. it requires inclusion as a disclaimer of opinion.
c. it requires inclusion as an ‘except for’ opinion.
d. the going concern basis is inappropriate.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
11. The event in a subsequent period that is an example of a condition existing at the reporting
date is:
a. loss resulting from a flood.
b. discovery of fraud or errors.
c. purchase of a business.
d. the issue of preferred shares.
The correct answer is b.
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Testbank to accompany Modern Auditing and Assurance Services 6e
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
12. Ordinarily, an event indicating a material condition arising after the reporting date requires:
a. disclosure.
b. adjustment.
c. inclusion as an ‘except for’.
d. adjustment and disclosure.
The correct answer is a.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
13. The subsequent event that is an example of a condition occurring after the reporting date is:
a. realisation of recorded year-end receivables at a different amount than recorded.
b. settlement of recorded year-end estimated product warranty liabilities at a different
amount than recorded.
c. determining the proceeds of assets sold before the end of the reporting period.
d. purchase of a business.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
14. When a question arises regarding the going-concern basis additional procedures may be
necessary. Which of the following procedures is an example of a valid additional procedure?
a. Consider the effect of unfilled customer orders.
b. Review the terms of debenture and loan agreements.
c. Analyse the final financial statements.
d. All of the above.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
15. The auditing standards suggest that management representations are acceptable audit
evidence where other sufficient appropriate audit evidence:
a. management representations are never appropriate audit evidence for financial statement
assertions.
b. cannot reasonably be expected to exist .
c. can reasonably be expected to exist.
d. has not been furnished to the auditor.
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Chapter 18: Completing the audit
The correct answer is b.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
16. A representation letter to a lawyer would not normally ask for confirmation of, or
information about:
a. directors’ description of the situation.
b. reasonableness of directors’ estimates of the likely amounts of settlement.
c. any open files that may have been referred to other legal firms.
d. a representation letter would normally ask about all of the above.
The correct answer is c.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
17. The representation letter to a lawyer provides the auditor with:
a. initial information about litigation and claims.
b. corroboration of the information on litigation and claims provided by the auditor’s
solicitors.
c. corroboration of the information on litigation and claims provided by management.
d. corroboration of the information on litigation and claims provided by the other party to
the matter.
The correct answer is c.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
18. An existing condition, situation or set of circumstances that involves uncertainty as to a
possible gain, that will be resolved when one or more future events occur or fail to occur is:
a. estimated value.
b. projected event.
c. a contingent asset.
d. a contingent liability.
The correct answer is c.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
19. Normally the initial source of information about litigation, claims, and unrecorded or
contingent liabilities is:
a. the board of directors.
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Testbank to accompany Modern Auditing and Assurance Services 6e
b. the client’s solicitors.
c. the audit committee.
d. management.
The correct answer is d.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
20. When a solicitor refuses to respond to a letter of audit inquiry and alternative audit
procedures are unsuccessful, the auditor will normally:
a. contact the client’s in-house solicitor for the relevant information.
b. issue a qualified opinion or a disclaimer of opinion.
c. issue an unqualified opinion with an emphasis of matter paragraph.
d. issue an adverse opinion.
The correct answer is b.
Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to events occurring
after the end of the financial year.
21. The auditor has decided that the financial statements are affected by an uncertainty that is not
susceptible to reasonable estimation at the balance sheet date. If this uncertainty is adequately
disclosed in the financial statements, the auditor's report should contain a(n):
a. standard unqualified opinion.
b. adverse opinion.
c. disclaimer of opinion.
d. unqualified opinion with an ‘emphasis of matter’ paragraph.
The correct answer is d.
Learning objective 18.2 ~ explain the different types of accounting treatments for events
occurring after the end of the financial year.
22. Which of these responsibilities of the auditor is not undertaken as part of the evaluation of
the findings?
a. Undertake a final assessment of materiality and audit risk.
b. Undertake a technical review of the financial report.
c. Prepare the written communication to those charged with governance.
d. Formulate an opinion and draft the audit report.
The correct answer is c.
Learning objective 18.2 ~ explain the different types of accounting treatments for events
occurring after the end of the financial year.
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Chapter 18: Completing the audit
23. In making the technical review of the financial statements, the auditor is likely to use a
detailed financial statement checklist provided by:
a. the client.
b. CPA Australia.
c. the ASIC.
d. the audit firm.
The correct answer is d.
Learning objective 18.2 ~ explain the different types of accounting treatments for events
occurring after the end of the financial year.
24. During the final review of the working papers, the partner in charge of the engagement would
ordinarily be expected to review working papers:
a. prepared by seniors.
b. reviewed by managers.
c. reviewed by seniors.
d. perceived to have high risk.
The correct answer is d.
Learning objective 18.2 ~ explain the different types of accounting treatments for events
occurring after the end of the financial year.
25. The manager’s review of the working papers is not designed to obtain assurance that:
a. the judgements exercised by subordinates were reasonable and appropriate in the
circumstances.
b. the work done by subordinates has been completed in a cost effective manner.
c. the working papers support the auditor’s opinion.
d. all significant accounting, auditing, and reporting questions raised during the
examination have been properly resolved.
The correct answer is b.
Learning objective 18.2 ~ explain the different types of accounting treatments for events
occurring after the end of the financial year.
26. Before reaching a final decision on the audit opinion to be issued, a conference is generally
held with the client. At this meeting, all of the following may be expected, except:
a. an oral report of the auditor’s major findings.
b. the auditor’s rationale for proposed adjustments or additional disclosures.
c. delivery of the written communication of audit matters to those charged with
governance.
d. agreement between the auditor and client on the changes to be made.
The correct answer is c.
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Testbank to accompany Modern Auditing and Assurance Services 6e
Learning objective 18.3 ~ explain the procedures in ensuring that the going concern basis is
appropriate.
27. Legal precedent requires the auditor to report not just to management but to an appropriate
level of management, any significant matters identified as a result of audit procedures
performed. Which of the following cases is the relevant legal precedent?
a. Pacific Acceptance.
b. AWA.
c. Kingston Cotton Mills.
d. Esanda Finance.
The correct answer is b.
Learning objective 18.3 ~ explain the procedures in ensuring that the going concern basis is
appropriate.
28. Professional standards require the auditor to communicate certain matters pertaining to the
audit to those charged with governance. This communication would normally include all of
the following except:
a. disagreements with management.
b. audit adjustments.
c. specific audit procedures performed.
d. material uncertainties that may cast doubt on the entity’s ability to continue as a going
concern.
The correct answer is c.
Learning objective 18.3 ~ explain the procedures in ensuring that the going concern basis is
appropriate.
29. Significant matters identified as a result of audit procedures often include those relating to
the internal control structure that the auditor feels would be of particular interest to:
a. the CEO.
b. the regulators.
c. the accounting staff.
d. the audit committee.
The correct answer is d.
Learning objective 18.3 ~ explain the procedures in ensuring that the going concern basis is
appropriate.
30. Matters that would ordinarily be communicated to an audit committee do not include:
a. major issues that were discussed with management pertaining to the appointment of the
auditor.
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Chapter 18: Completing the audit
b. unreasonable delays in management providing information.
c. all errors and problems revealed by the audit.
d. all of the above matters would ordinarily be communicated to an audit committee.
The correct answer is c.
Learning objective 18.3 ~ explain the procedures in ensuring that the going concern basis is
appropriate.
Short answer questions
Short Answer 18-1
Distinguish conditions existing at the reporting date and conditions arising after the
reporting date as they relate to subsequent events.
Answer 18-1
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Testbank to accompany Modern Auditing and Assurance Services 6e


AASB 110 (IAS 10) states that the financial statements must reflect the financial effect of an
event occurring after the end of the reporting period that provides additional evidence of
conditions that existed at the end of the reporting period.
Where an event occurring after the end of the reporting period provides new information that
does not relate to conditions existing at year-end, the information should be disclosed by way
of a note to the accounts if non-disclosure has the potential to adversely affect decisions
made by users of the financial statements.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Short Answer 18-2
1. Identify the audit procedures normally associated with subsequent events.
2. What actions may the auditor take when he concludes at the end of the audit that audit risk is
not acceptable?
Answer 18-2
1. The procedures include:
 reviewing procedures that management has established to ensure that subsequent events
are identified
 reading minutes of the meetings of shareholders, those charged with governance, audit
and executive committees held after the reporting date, and enquiring about matters
discussed at meetings for which minutes are not yet available
 reading the entity’s latest available interim financial statements and, as considered
necessary and appropriate, budgets, cash flow forecasts and other related management
reports
 enquiring of the entity’s lawyers
 enquiring of management as to whether any subsequent events have occurred that may
affect the financial statements.
2. When audit risk is unacceptable, the auditor should perform additional substantive tests or
convince the client to make corrections necessary to reduce the risk of material misstatement
to an acceptable level. If management does not make the adjustments as required then the
auditor may decide to issue a qualified audit report.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Learning objective 18.2 ~ explain the different types of accounting treatments for events
occurring after the end of the financial year.
Short Answer 18-3
Explain the responsibilities of the auditor regarding subsequent events:
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Chapter 18: Completing the audit
1 after reporting date, but before the audit report is signed
2 after the audit report is signed, but before the financial statements are issued
3 after the financial statements are issued.
Answer 18-3
1 Auditors have a responsibility to discover and evaluate all subsequent events that may have a
material effect on the financial statements.
2 Auditors have a responsibility to examine only events that come to their attention.
3 Auditors have a responsibility to examine only events that come to their attention and that
existed at the date of the auditor’s report.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Short Answer 18-4
1. If management amends the financial statements due to subsequent events occurring after the
date of the auditor’s report but before the financial statements are issued, what further actions
are necessary?
2. What are the auditor’s options if management refuses to amend the financial statements,
where the auditor believes they should be amended, when?
a. the auditor has not released the report to the entity.
b. the auditor has released the report to the entity.
Answer 18-4
1 If management amends the financial statements due to subsequent events after the auditor’s
report has been written but before the statements have been issued, they must carry out any
necessary auditing procedures, including extending the review of after-reporting-date events,
and reissuing the auditor’s report at the date of approval of the amended financial statements.
2. a. If the auditor has not released the report, they should issue a qualified or adverse opinion.
b. If the auditor has released the report they should act to prevent reliance on the auditor’s
report. This could be done, for example, by exercising the right to be heard at the general
meeting at which the audited financial statements are presented to members.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Short Answer 18-5
1. How should management disclose material adjusting events? Give three examples of common
adjusting events.
2. How should management disclose material non-adjusting events? Give three examples of
common non-adjusting events.
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Testbank to accompany Modern Auditing and Assurance Services 6e
Answer 18-5
1. Adjusting events require the financial statements to be adjusted. Common examples of
adjusting events include accounting estimates:
 selling price of inventories after the end of the financial year which provides evidence of
the net realizable value at the end of the reporting period
 the settlement of contingent legal liabilities
 bankruptcy of a trade receivable customer
 discovery of fraud or errors that show the financial statements are incorrect
 determination, after the reporting date, of the proceeds on sale of assets, or the cost of
assets purchased.
2. Non-adjusting events are disclosed by way of a note to the accounts. Examples of nonadjusting events include:
 a fire or flood after reporting date
 a major currency realignment after reporting date
 the raising of additional share or loan capital
 mergers or acquisitions after reporting date.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Short Answer 18-6
What is the relevant period for assessing whether or not the use of the going concern basis is
appropriate? During which stage of the audit does the auditor perform most of the procedures for
assessing the use of the going concern basis? Give four examples of such procedures.
Answer 18-6
The relevant period extends to the expected date of the auditor’s report for the succeeding
financial statement period. Going concern is assessed during the planning stage of the audit and
again during the completion of the audit. The following procedures are usually conducted during
the period of completion of the audit:
 analysing and discussing cash flow, profit and other relevant forecasts with management.
 analysing and discussing the entity’s latest available interim financial statements.
 reviewing the terms of debentures and loan agreements and determining whether any have
been breached.
 reading minutes of the meetings of shareholders, those charged with governance and
relevant committees for reference to financing difficulties.
 enquiring of the entity’s lawyer regarding the existence of litigation and claims and the
reasonableness of management’s assessments of their outcome and the estimate of their
financial implications.
 confirming the existence, legality and enforceability of arrangements to provide or to
maintain financial support with related and third parties and assessing the financial ability
of such parties to provide additional funds.
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Chapter 18: Completing the audit
 considering the entity’s plans to deal with unfilled customer orders.
 reviewing events after period end to identify those that either mitigate or otherwise affect
the entity’s ability to continue as a going concern.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Short Answer 18-7
Your client has returned to you the representation letter that they sent to their lawyer. The letter
contains the following statement from the client’s lawyer:
“the directors seem to underestimate the likelihood of losing the case, and the potential
financial settlement amount. We believe that there is little chance of successfully defending
the matter, and expect that there will be amounts payable in the vicinity of $3 million, not
$1 million. We do however remind you that the matter is only in preliminary stages and
could still go either way”.
Has the auditor collected this evidence in the appropriate way? What should the auditor do in
regards to the information provided by the lawyer?
Answer 18-7
The auditor should have sent the letter to the lawyer, and it should have been returned directly to
the auditor.
Assuming that the disagreement with management’s original evaluation of the matter is material,
then the auditor should seek discussion with management and the lawyer. If the disagreement is
not resolved, then the auditor will consider the effect on the auditor’s report.
The fact that the matter is “only in preliminary stages and could still go either way” means that
the financial statements are affected by an inherent uncertainty that is not susceptible to
reasonable estimation at reporting date. If the matter is disclosed adequately in the financial
statements then the auditor’s report will contain an emphasis of matter section. If the disclosure
is not adequate, then the auditor’s report would express a qualified or adverse opinion on the
basis of a disagreement with those charged with governance.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
Short Answer 18-8
Contrast the roles of audit managers and audit partners in the final review stage of the audit.
Why would a firm require a second partner review?
Answer 18-8
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Testbank to accompany Modern Auditing and Assurance Services 6e
The audit manager will often review all of the audit working papers to ensure that the work has
been performed properly. He/she will likely use a detailed checklist and create a list of queries to
be raised and cleared with the person who created the workpapers before the audit is completed.
The partner’s review will probably not include all working papers, but will focus on sections of
the audit perceived to be of high risk.
A second partner review may be required. A partner who did not participate in the audit would
conduct it so that the objectivity of the reviewer may challenge matters approved by earlier
reviews. It provides additional assurance that all auditing standards and the firm’s quality control
standards have been met.
Reference: Learning objective 18.2 ~ explain the different types of accounting treatments for
events occurring after the end of the financial year.
Short Answer 18-9
What are the objectives of the management representation letter? Under what circumstances are
management representations considered acceptable audit evidence?
Answer 18-9
The objectives of the management representation letter include:
 acknowledge management’s responsibility for the presentation of the financial statements
 confirm with management and those charged with governance for the completeness of the
information provided to the auditor
 support other audit evidence relevant to the financial report or specific assertions in the
financial report
 confirmation of oral representations given to the auditor
 document the continuing appropriateness of representations
 reduce the possibility of misunderstandings concerning management’s representations.
Management representations are considered acceptable audit evidence only where other
sufficient appropriate audit evidence cannot reasonably be expected to exist. However it is still
prudent to consider management representations to be supporting rather than primary evidence.
Reference: Learning objective 18.1 ~ describe the auditor’s responsibilities with respect to
events occurring after the end of the financial year.
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