Chapter 16 - Auditing Operations and Completing the Audit
Chapter 16
Auditing Operations and Completing the Audit
True / False Questions
1. Analytical procedures are often used for verification of income statement accounts.
True False
2. The Miscellaneous Revenue account should only be analyzed if it is material in amount.
True False
3. Internal control over payroll is enhanced when the personnel department distributes payroll
checks.
True False
4. The auditors have a responsibility to report on all FASB-required supplementary
information.
True False
5. Subsequent events that provide additional evidence as to conditions that existed at the
balance sheet date may result in adjusting journal entries.
True False
6. Dual dating of an audit report extends the auditors' liability for disclosure through the later
date for all areas of the financial statements.
True False
7. If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the
lawyer is not required to inform the auditors of the omission.
True False
16-1
Chapter 16 - Auditing Operations and Completing the Audit
8. Normally, general risk contingencies need not be disclosed in the financial statements.
True False
9. If not adjusted, a situation in which the total likely misstatement in the financial statements
exceeds a material amount is likely to lead to an audit report modification.
True False
10. Common to future purchase commitments is the fact that they should be recorded as
liabilities at discounted values as of year-end.
True False
Multiple Choice Questions
11. Analytical procedures are required as a part of the
A. Detailed tests of balances.
B. Internal control assessment.
C. Overall review at the conclusion of the audit.
D. Substantive testing.
12. The statement that best expresses the auditor's responsibility with respect to events
occurring between the balance sheet date and the end of his audit is that:
A. The auditor has no responsibility for events occurring in the subsequent period unless these
events affect transactions recorded on or before the balance sheet date.
B. The auditor's responsibility is to determine that a proper cutoff has been made and that
transactions recorded on or before the balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period and should
extend all detailed procedures through the last day of field work.
D. The auditor is responsible for determining that a proper cutoff has been made and
performing a general review of events occurring in the subsequent period.
16-2
Chapter 16 - Auditing Operations and Completing the Audit
13. Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero
Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which
seems recoverable. The receivable had been questionable for some time as Bingo had been
experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not
occur until after Zero Corporation's year-end. Under these circumstances:
A. Option A
B. Option B
C. Option C
D. Option D
14. In auditing the balance sheet, most revenue and expense accounts are also audited. Which
accounts are most likely to be audited when auditing Accounts Receivable?
A. Sales and Cost of Goods Sold.
B. Interest and Bad Debt Expense.
C. Sales and Bad Debt Expense.
D. Interest and Cost of Goods Sold.
15. Auditors should perform audit procedures relating to subsequent events?
A. Through year end.
B. Through issuance of the audit report.
C. Through the last day of field work.
D. For a reasonable period after year end.
16-3
Chapter 16 - Auditing Operations and Completing the Audit
16. Which of the following procedures would an auditor most likely perform while evaluating
audit findings at the conclusion of an audit?
A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in
the financial statements.
B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
C. Determine whether reportable conditions have corrected.
D. Develop an estimate of the total likely misstatement in the financial statements.
17. Which of the following ledger accounts would be least likely to be analyzed in detail by
auditors?
A. Miscellaneous revenue.
B. Professional fees.
C. Travel expense.
D. Repairs and maintenance.
18. When auditing the statement of cash flows of a profitable, growing company which
combination is most likely?
A. Option A
B. Option B
C. Option C
D. Option D
19. The audit of which of the following balance sheet accounts does not normally result in
verification of an income statement account?
A. Cash.
B. Accounts receivable.
C. Property, plant and equipment.
D. Intangible assets.
16-4
Chapter 16 - Auditing Operations and Completing the Audit
20. An example of an internal control weakness is to assign the payroll department the
responsibility for:
A. Preparing the payroll expense distribution.
B. Preparing the payroll checks.
C. Authorizing increases in pay.
D. Preparing journal entries for payroll expense.
21. An example of an internal control weakness is to assign the personnel department
responsibility for:
A. Distribution of paychecks.
B. Hiring personnel.
C. Authorizing deductions from pay.
D. Interviewing employees for jobs.
22. Which of the following audit procedures is aimed at determining whether every name on
the company payroll is an employee actually on the job?
A. A surprise observation of a paycheck distribution.
B. A test of payroll extensions.
C. Analytical comparisons of budgeted to actual payroll expense.
D. Comparison of payee names on canceled payroll checks with the payroll register.
23. Which of the following is not a procedure that is designed to provide evidence about the
existence of loss contingencies?
A. Obtaining a lawyers' letter.
B. Confirming accounts payable.
C. Reviewing the minutes of board of directors' meetings.
D. Review correspondence with banks.
24. Which of the following types of matters do not generally require disclosure in the
financial statements?
A. General risk contingencies.
B. Commitments.
C. Loss contingencies.
D. Liabilities to related parties.
16-5
Chapter 16 - Auditing Operations and Completing the Audit
25. Material loss contingencies should be recorded in the financial statements if available
information indicates it is probable that a loss had been sustained prior to the balance sheet
date and the amount of such loss can be reasonably estimated. These considerations will
affect the audit report as follows:
A. If a loss has been recorded in accordance with these criteria, the auditor may issue an
unqualified opinion but is required to point out the contingency in an explanatory paragraph
of the report.
B. If a loss meets these criteria but is disclosed in the financial statement notes rather than
being recorded therein, the auditor may issue an unqualified opinion, but is required to point
out the contingency in an explanatory paragraph of the report.
C. If a loss meets these criteria but is disclosed in the financial statement notes rather than
being recorded therein, the auditor may issue an unqualified opinion, but should consider
adding an explanatory paragraph as a means of emphasizing the disclosure.
D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the
notes to the financial statements rather than being recorded therein, the auditor may issue an
unqualified opinion.
26. A refusal by a lawyer to furnish information related to litigation included in the letter of
inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report.
C. An assessment that loss of the litigation is probable.
D. An adverse opinion.
27. If, after issuing an audit report, the auditors find that they have failed to perform certain
significant audit procedures they should first:
A. Attempt to determine whether their report is still being relied upon by third parties.
B. Notify regulatory agencies.
C. Notify legal counsel.
D. Wait until the beginning of the next year's audit to determine whether misstatements have
occurred.
16-6
Chapter 16 - Auditing Operations and Completing the Audit
28. Which of the following is not a procedure that auditors typically perform to search for
significant events during the subsequent period?
A. Review minutes of board of directors' meeting.
B. Review the latest available interim financial statements.
C. Inquire about any unusual adjustments made subsequent to the balance sheet date.
D. Review changes in internal control during the period subsequent to the balance sheet date.
29. Which of the following subsequent events might require an adjustment to the client's
financial statements?
A. A business combination with another company.
B. Loss on the sale of a closely-held investment.
C. Loss of plant and equipment due to a fire.
D. Retirement of bonds payable at a loss.
30. Authorization of which of the following is least likely to be found during a review of the
minutes of the board of directors?
A. Dividends.
B. New debt issuance.
C. New bank accounts.
D. Writeoff of trade accounts receivable.
31. Which of the following is not a procedure normally performed while completing the
audit?
A. Obtain a lawyer's letter.
B. Obtain a representations letter.
C. Perform an overall review using analytical procedures.
D. Obtain confirmation of capital stockholdings from shareholders.
32. Auditors must communicate internal control "significant deficiencies" to:
A. The audit committee.
B. The shareholders.
C. The SEC.
D. The Federal Trade Commission.
16-7
Chapter 16 - Auditing Operations and Completing the Audit
33. Which of the following procedures is not a procedure that is completed near the end of the
engagement?
A. Review cash transactions.
B. Review to identify subsequent events.
C. Obtain the lawyer's letter.
D. Obtain the letter of representations.
34. Which of the following information must be reported on in the auditors' report?
A. FASB-required supplementary information.
B. Other information in client-prepared documents.
C. Information accompanying financial statements in auditor-submitted documents.
D. GASB-required supplementary information.
35. In evaluating whether there is a sufficiently low probability of material misstatement in
the financial statements, the auditors accumulate:
A. Likely misstatements in the financial statements.
B. Known misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the financial statements.
D. Known, projected and potential misstatements in the financial statements.
36. Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
A. Extrapolation difference.
B. Known misstatement.
C. Likely misstatement.
D. Projected misstatement.
37. The review of audit working papers by the audit partner is normally completed:
A. Prior to year-end.
B. Immediately as each working paper is completed.
C. Near the completion of field work.
D. After issuance of the audit report, but prior to required subsequent event review
procedures.
16-8
Chapter 16 - Auditing Operations and Completing the Audit
38. Management estimates the company's allowance for doubtful accounts as $200,000, and
the auditors develop an estimate that suggests that the amount should be between $230,000
and $250,000. The known misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000
39. Management estimates the company's allowance for doubtful accounts as $200,000, and
the auditors develop an estimate that suggests that the amount should be between $230,000
and $250,000. The likely misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000
40. An approach that quantifies the total likely misstatement as of the current year-end based
on the effects of reflecting misstatements during the current year (and not considering any
unadjusted previous year misstatements) is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
41. An approach that quantifies the total likely misstatement as of the current year-end based
on the effects of reflecting all misstatements existing in the balance sheet at the end of the
current year, irrespective of whether the misstatements occurred in the current or previous
years is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
16-9
Chapter 16 - Auditing Operations and Completing the Audit
42. A client's previous two years of financial statements understated estimated warranty
payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors
estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000
represents a material amount. Assuming that the entire understatement is to be recorded,
following SEC SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
43. A client's previous two years financial statements understated estimated warranty payable
by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that
the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a
material amount. Assuming that the entire understatement is to be recorded, following SEC
SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
44. One reason why the independent auditors perform analytical procedures on the client's
operations is to identify:
A. Weaknesses of a material nature in internal control.
B. Non-compliance with prescribed control procedures.
C. Improper separation of accounting and other financial duties.
D. Unusual transactions.
45. Which of the following is an analytical procedure that should be applied to the income
statement?
A. Select sales and expense items and trace amounts to related supporting documents.
B. Ascertain that the net income amount in the statement of cash flows agrees with the net
income amount in the income statement.
C. Obtain from the proper client representatives, the beginning and ending inventory amounts
that were used to determine costs of sales.
D. Compare the actual revenues and expenses with the corresponding figures of the previous
year and investigate significant differences.
16-10
Chapter 16 - Auditing Operations and Completing the Audit
46. It would be appropriate for the payroll accounting department to be responsible for which
of the following functions?
A. Approval of employee time records.
B. Maintenance of records of employment, discharges, and pay increases.
C. Preparation of periodic governmental reports as to employees' earnings and withholding
taxes.
D. Distribution of paychecks to employees.
47. Which of the following is the best reason why the auditors should consider observing a
client's distribution of regular payroll checks?
A. Separation of payroll duties is less than adequate for effective internal control.
B. Total payroll costs are a significant part of total operating costs.
C. The auditors did not observe the distribution of the entire regular payroll during the audit in
the prior year.
D. Employee turnover is excessive.
48. To minimize the opportunities for fraud, unclaimed cash payroll should be:
A. Deposited in a safe deposit box.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.
49. The purpose of segregating the duties of distributing payroll checks and hiring personnel
is to:
A. Separate the custody of assets from the accounting for those assets.
B. Establish clear lines of authority and responsibility.
C. Separate duties within the accounting function.
D. Separate the authorization of transactions from the custody of related assets.
16-11
Chapter 16 - Auditing Operations and Completing the Audit
50. A CPA reviews a client's payroll procedures. The CPA would consider internal control to
be less than effective if a payroll department supervisor was assigned the responsibility for:
A. Reviewing and approving time reports for subordinate employees.
B. Distributing payroll checks to employees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate employees.
51. A common audit procedure in the audit of payroll transactions involves tracing selected
items from the payroll journal to employee time cards that have been approved by supervisory
personnel. This procedure is designed to provide evidence in support of the audit proposition
that:
A. Only bona fide employees worked and their pay was properly computed.
B. Jobs on which employees worked were charged with the appropriate labor cost.
C. Internal control relating to payroll disbursements are operating effectively.
D. Employees worked the number of hours for which their pay was computed.
52. Which of the following material events occurring subsequent to the balance sheet date
would require an adjustment to the financial statements before they could be issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business which is expected to double the sales volume.
D. Settlement of litigation in excess of the recorded liability.
53. With respect to issuance of an audit report which is dual dated for a subsequent event
occurring after the completion of field work but before issuance of the auditors' report, the
auditors' responsibility for events occurring subsequent to the completion of field work is:
A. Extended to include all events occurring until the date of the last subsequent event referred
to.
B. Limited to the specific event referred to.
C. Limited to all events occurring through the date of issuance of the report.
D. Extended to include all events occurring through the date of submission of the report to the
client.
16-12
Chapter 16 - Auditing Operations and Completing the Audit
54. An auditor's decision concerning whether or not to "dual date" the audit report is based
upon the auditor's willingness to:
A. Extend auditing procedures.
B. Accept responsibility for year-end adjusting entries.
C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the
auditor's report.
D. Assume responsibility for resolving all events subsequent to the issuance of the auditor's
report.
55. Auditors often request that the audit client send a letter of inquiry to those attorneys who
have been consulted with respect to litigation, claims, or assessments. The primary reason for
this request is to provide the auditors with:
A. An estimate of the dollar amount of the probable loss.
B. An expert opinion as to whether a loss is possible, probable or remote.
C. Information concerning the progress of cases to date.
D. Corroborative audit evidence.
56. The auditors' primary means of obtaining corroboration of management's information
concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.
57. Which of the following auditing procedures is ordinarily performed last?
A. Reading of the minutes of the directors' meetings.
B. Confirming accounts payable.
C. Obtaining a management representation letter.
D. Testing of the purchasing function.
16-13
Chapter 16 - Auditing Operations and Completing the Audit
58. Which of the following is not correct relating to representation letters?
A. They are ordinarily dated as of the date of the audit report.
B. They are signed by members of top management.
C. They must be obtained for audits.
D. They often serve as a substitute for the application of other procedures.
59. The date the auditor grants the client permission to use the audit report in connection with
the financial statements is the:
A. Last day of significant field work.
B. Report cutoff date.
C. Report release date.
D. Representation date.
60. 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. "Sufficient audit evidence has been made available to the auditor to permit the issuance of
an unqualified opinion."
B. "There are no unasserted claims or assessments that our lawyer has advised us are probable
of assertion and must be disclosed."
C. "We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date that would require
adjustment to, or disclosure in, the financial statements."
61. To which of the following matters would materiality limits not apply when obtaining
written client representations?
A. Violations of state labor regulations.
B. Disclosure of line-of-credit arrangements.
C. Information about related party transactions.
D. Instances of fraud involving management.
16-14
Chapter 16 - Auditing Operations and Completing the Audit
62. The auditors' best course of action with respect to "other financial information" included
in a client prepared annual report containing the auditors' report is to:
A. Indicate in the auditors' report, that the "other financial information" is unaudited.
B. Consider whether the "other financial information" is accurate by performing a limited
review.
C. Obtain written representations from managements as to the material accuracy of the "other
financial information."
D. Read and consider the manner of presentation of the "other financial information."
63. In the course of the audit of financial statements for the purpose of expressing an opinion
thereon, the auditors will normally prepare a schedule of unadjusted differences for which the
auditors did not propose adjustment when they were identified. What is the primary purpose
served by this schedule?
A. To point out to the responsible client officials the errors made by various company
personnel.
B. To summarize the adjustments that must be made before the company can prepare and
submit its federal tax return.
C. To identify the potential financial statement effects of misstatement or disputed items that
were considered immaterial when discovered.
D. To summarize the misstatements made by the company so that corrections can be made
after the audited financial statements are released.
64. An auditor will ordinarily examine invoices from lawyers primarily in order to:
A. Substantiate accruals.
B. Assess the legal ramifications of litigation in progress.
C. Estimate the dollar amount of contingent liabilities.
D. Identify possible unasserted litigation, claims and assessments.
65. The auditor's primary means of obtaining corroboration of management's information
concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.
16-15
Chapter 16 - Auditing Operations and Completing the Audit
Essay Questions
66. Auditors must be concerned with events that occur subsequent to the balance sheet date,
because the events may need to be reflected in the financial statements.
a. Describe the two general types of subsequent events.
b. What is the auditors' responsibility with respect to detecting subsequent events?
c. List three audit procedures that are used by the auditors to search for subsequent events.
67. Auditors are concerned with the existence of loss contingencies that may affect the client's
financial statements. One way that the auditors obtain evidence about existing loss
contingencies is through the lawyer's letter.
a. Describe the information that the auditors wish to obtain about the litigation being handled
by a lawyer.
b. Describe three other procedures that are used by auditors to discover existing loss
contingencies.
16-16
Chapter 16 - Auditing Operations and Completing the Audit
68. The auditors' responsibility for information that accompanies audited financial statements
varies with the nature of the information and the nature of the document.
a. Describe the auditors' responsibility regarding FASB-required supplementary information.
b. Describe the auditors' responsibility regarding other information in client-prepared
documents.
c. Describe the auditors' responsibility regarding information accompanying financial
statements in auditor-prepared documents.
16-17
Chapter 16 - Auditing Operations and Completing the Audit
Chapter 16 Auditing Operations and Completing the Audit Answer Key
True / False Questions
1. Analytical procedures are often used for verification of income statement accounts.
TRUE
Difficulty: Easy
2. The Miscellaneous Revenue account should only be analyzed if it is material in amount.
FALSE
Difficulty: Medium
3. Internal control over payroll is enhanced when the personnel department distributes payroll
checks.
FALSE
Difficulty: Easy
4. The auditors have a responsibility to report on all FASB-required supplementary
information.
FALSE
Difficulty: Medium
16-18
Chapter 16 - Auditing Operations and Completing the Audit
5. Subsequent events that provide additional evidence as to conditions that existed at the
balance sheet date may result in adjusting journal entries.
TRUE
Difficulty: Medium
6. Dual dating of an audit report extends the auditors' liability for disclosure through the later
date for all areas of the financial statements.
FALSE
Difficulty: Medium
7. If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the
lawyer is not required to inform the auditors of the omission.
TRUE
Difficulty: Medium
8. Normally, general risk contingencies need not be disclosed in the financial statements.
TRUE
Difficulty: Medium
9. If not adjusted, a situation in which the total likely misstatement in the financial statements
exceeds a material amount is likely to lead to an audit report modification.
TRUE
Difficulty: Easy
16-19
Chapter 16 - Auditing Operations and Completing the Audit
10. Common to future purchase commitments is the fact that they should be recorded as
liabilities at discounted values as of year-end.
FALSE
Difficulty: Medium
Multiple Choice Questions
11. Analytical procedures are required as a part of the
A. Detailed tests of balances.
B. Internal control assessment.
C. Overall review at the conclusion of the audit.
D. Substantive testing.
Difficulty: Medium
12. The statement that best expresses the auditor's responsibility with respect to events
occurring between the balance sheet date and the end of his audit is that:
A. The auditor has no responsibility for events occurring in the subsequent period unless these
events affect transactions recorded on or before the balance sheet date.
B. The auditor's responsibility is to determine that a proper cutoff has been made and that
transactions recorded on or before the balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period and should
extend all detailed procedures through the last day of field work.
D. The auditor is responsible for determining that a proper cutoff has been made and
performing a general review of events occurring in the subsequent period.
Difficulty: Hard
16-20
Chapter 16 - Auditing Operations and Completing the Audit
13. Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero
Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which
seems recoverable. The receivable had been questionable for some time as Bingo had been
experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not
occur until after Zero Corporation's year-end. Under these circumstances:
A. Option A
B. Option B
C. Option C
D. Option D
Difficulty: Hard
14. In auditing the balance sheet, most revenue and expense accounts are also audited. Which
accounts are most likely to be audited when auditing Accounts Receivable?
A. Sales and Cost of Goods Sold.
B. Interest and Bad Debt Expense.
C. Sales and Bad Debt Expense.
D. Interest and Cost of Goods Sold.
Difficulty: Medium
15. Auditors should perform audit procedures relating to subsequent events?
A. Through year end.
B. Through issuance of the audit report.
C. Through the last day of field work.
D. For a reasonable period after year end.
Difficulty: Easy
16-21
Chapter 16 - Auditing Operations and Completing the Audit
16. Which of the following procedures would an auditor most likely perform while evaluating
audit findings at the conclusion of an audit?
A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in
the financial statements.
B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement.
C. Determine whether reportable conditions have corrected.
D. Develop an estimate of the total likely misstatement in the financial statements.
Difficulty: Medium
17. Which of the following ledger accounts would be least likely to be analyzed in detail by
auditors?
A. Miscellaneous revenue.
B. Professional fees.
C. Travel expense.
D. Repairs and maintenance.
Difficulty: Hard
18. When auditing the statement of cash flows of a profitable, growing company which
combination is most likely?
A. Option A
B. Option B
C. Option C
D. Option D
Difficulty: Hard
16-22
Chapter 16 - Auditing Operations and Completing the Audit
19. The audit of which of the following balance sheet accounts does not normally result in
verification of an income statement account?
A. Cash.
B. Accounts receivable.
C. Property, plant and equipment.
D. Intangible assets.
Difficulty: Hard
20. An example of an internal control weakness is to assign the payroll department the
responsibility for:
A. Preparing the payroll expense distribution.
B. Preparing the payroll checks.
C. Authorizing increases in pay.
D. Preparing journal entries for payroll expense.
Difficulty: Medium
21. An example of an internal control weakness is to assign the personnel department
responsibility for:
A. Distribution of paychecks.
B. Hiring personnel.
C. Authorizing deductions from pay.
D. Interviewing employees for jobs.
Difficulty: Easy
22. Which of the following audit procedures is aimed at determining whether every name on
the company payroll is an employee actually on the job?
A. A surprise observation of a paycheck distribution.
B. A test of payroll extensions.
C. Analytical comparisons of budgeted to actual payroll expense.
D. Comparison of payee names on canceled payroll checks with the payroll register.
Difficulty: Medium
16-23
Chapter 16 - Auditing Operations and Completing the Audit
23. Which of the following is not a procedure that is designed to provide evidence about the
existence of loss contingencies?
A. Obtaining a lawyers' letter.
B. Confirming accounts payable.
C. Reviewing the minutes of board of directors' meetings.
D. Review correspondence with banks.
Difficulty: Medium
24. Which of the following types of matters do not generally require disclosure in the
financial statements?
A. General risk contingencies.
B. Commitments.
C. Loss contingencies.
D. Liabilities to related parties.
Difficulty: Medium
25. Material loss contingencies should be recorded in the financial statements if available
information indicates it is probable that a loss had been sustained prior to the balance sheet
date and the amount of such loss can be reasonably estimated. These considerations will
affect the audit report as follows:
A. If a loss has been recorded in accordance with these criteria, the auditor may issue an
unqualified opinion but is required to point out the contingency in an explanatory paragraph
of the report.
B. If a loss meets these criteria but is disclosed in the financial statement notes rather than
being recorded therein, the auditor may issue an unqualified opinion, but is required to point
out the contingency in an explanatory paragraph of the report.
C. If a loss meets these criteria but is disclosed in the financial statement notes rather than
being recorded therein, the auditor may issue an unqualified opinion, but should consider
adding an explanatory paragraph as a means of emphasizing the disclosure.
D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the
notes to the financial statements rather than being recorded therein, the auditor may issue an
unqualified opinion.
Difficulty: Hard
16-24
Chapter 16 - Auditing Operations and Completing the Audit
26. A refusal by a lawyer to furnish information related to litigation included in the letter of
inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report.
C. An assessment that loss of the litigation is probable.
D. An adverse opinion.
Difficulty: Medium
27. If, after issuing an audit report, the auditors find that they have failed to perform certain
significant audit procedures they should first:
A. Attempt to determine whether their report is still being relied upon by third parties.
B. Notify regulatory agencies.
C. Notify legal counsel.
D. Wait until the beginning of the next year's audit to determine whether misstatements have
occurred.
Difficulty: Medium
28. Which of the following is not a procedure that auditors typically perform to search for
significant events during the subsequent period?
A. Review minutes of board of directors' meeting.
B. Review the latest available interim financial statements.
C. Inquire about any unusual adjustments made subsequent to the balance sheet date.
D. Review changes in internal control during the period subsequent to the balance sheet date.
Difficulty: Hard
29. Which of the following subsequent events might require an adjustment to the client's
financial statements?
A. A business combination with another company.
B. Loss on the sale of a closely-held investment.
C. Loss of plant and equipment due to a fire.
D. Retirement of bonds payable at a loss.
Difficulty: Medium
16-25
Chapter 16 - Auditing Operations and Completing the Audit
30. Authorization of which of the following is least likely to be found during a review of the
minutes of the board of directors?
A. Dividends.
B. New debt issuance.
C. New bank accounts.
D. Writeoff of trade accounts receivable.
Difficulty: Medium
31. Which of the following is not a procedure normally performed while completing the
audit?
A. Obtain a lawyer's letter.
B. Obtain a representations letter.
C. Perform an overall review using analytical procedures.
D. Obtain confirmation of capital stockholdings from shareholders.
Difficulty: Medium
32. Auditors must communicate internal control "significant deficiencies" to:
A. The audit committee.
B. The shareholders.
C. The SEC.
D. The Federal Trade Commission.
Difficulty: Medium
33. Which of the following procedures is not a procedure that is completed near the end of the
engagement?
A. Review cash transactions.
B. Review to identify subsequent events.
C. Obtain the lawyer's letter.
D. Obtain the letter of representations.
Difficulty: Medium
16-26
Chapter 16 - Auditing Operations and Completing the Audit
34. Which of the following information must be reported on in the auditors' report?
A. FASB-required supplementary information.
B. Other information in client-prepared documents.
C. Information accompanying financial statements in auditor-submitted documents.
D. GASB-required supplementary information.
Difficulty: Medium
35. In evaluating whether there is a sufficiently low probability of material misstatement in
the financial statements, the auditors accumulate:
A. Likely misstatements in the financial statements.
B. Known misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the financial statements.
D. Known, projected and potential misstatements in the financial statements.
Difficulty: Hard
36. Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
A. Extrapolation difference.
B. Known misstatement.
C. Likely misstatement.
D. Projected misstatement.
Difficulty: Hard
37. The review of audit working papers by the audit partner is normally completed:
A. Prior to year-end.
B. Immediately as each working paper is completed.
C. Near the completion of field work.
D. After issuance of the audit report, but prior to required subsequent event review
procedures.
Difficulty: Easy
16-27
Chapter 16 - Auditing Operations and Completing the Audit
38. Management estimates the company's allowance for doubtful accounts as $200,000, and
the auditors develop an estimate that suggests that the amount should be between $230,000
and $250,000. The known misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000
Difficulty: Hard
39. Management estimates the company's allowance for doubtful accounts as $200,000, and
the auditors develop an estimate that suggests that the amount should be between $230,000
and $250,000. The likely misstatement in this situation is:
A. $0
B. $30,000
C. $40,000
D. $50,000
Difficulty: Medium
40. An approach that quantifies the total likely misstatement as of the current year-end based
on the effects of reflecting misstatements during the current year (and not considering any
unadjusted previous year misstatements) is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
Difficulty: Hard
16-28
Chapter 16 - Auditing Operations and Completing the Audit
41. An approach that quantifies the total likely misstatement as of the current year-end based
on the effects of reflecting all misstatements existing in the balance sheet at the end of the
current year, irrespective of whether the misstatements occurred in the current or previous
years is referred to as the:
A. Evaluation materiality approach.
B. Iron curtain approach.
C. Projected misstatement approach.
D. Rollover approach.
Difficulty: Hard
42. A client's previous two years of financial statements understated estimated warranty
payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors
estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000
represents a material amount. Assuming that the entire understatement is to be recorded,
following SEC SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
Difficulty: Hard
43. A client's previous two years financial statements understated estimated warranty payable
by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that
the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a
material amount. Assuming that the entire understatement is to be recorded, following SEC
SAB 108 the decrease in this year's income due to these understatements is:
A. $0
B. $60,000
C. $110,000
D. $140,000
Difficulty: Hard
16-29
Chapter 16 - Auditing Operations and Completing the Audit
44. One reason why the independent auditors perform analytical procedures on the client's
operations is to identify:
A. Weaknesses of a material nature in internal control.
B. Non-compliance with prescribed control procedures.
C. Improper separation of accounting and other financial duties.
D. Unusual transactions.
Difficulty: Medium
Source: AICPA
45. Which of the following is an analytical procedure that should be applied to the income
statement?
A. Select sales and expense items and trace amounts to related supporting documents.
B. Ascertain that the net income amount in the statement of cash flows agrees with the net
income amount in the income statement.
C. Obtain from the proper client representatives, the beginning and ending inventory amounts
that were used to determine costs of sales.
D. Compare the actual revenues and expenses with the corresponding figures of the previous
year and investigate significant differences.
Difficulty: Easy
Source: AICPA
46. It would be appropriate for the payroll accounting department to be responsible for which
of the following functions?
A. Approval of employee time records.
B. Maintenance of records of employment, discharges, and pay increases.
C. Preparation of periodic governmental reports as to employees' earnings and withholding
taxes.
D. Distribution of paychecks to employees.
Difficulty: Medium
Source: AICPA
16-30
Chapter 16 - Auditing Operations and Completing the Audit
47. Which of the following is the best reason why the auditors should consider observing a
client's distribution of regular payroll checks?
A. Separation of payroll duties is less than adequate for effective internal control.
B. Total payroll costs are a significant part of total operating costs.
C. The auditors did not observe the distribution of the entire regular payroll during the audit in
the prior year.
D. Employee turnover is excessive.
Difficulty: Medium
Source: AICPA
48. To minimize the opportunities for fraud, unclaimed cash payroll should be:
A. Deposited in a safe deposit box.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.
Difficulty: Easy
Source: AICPA
49. The purpose of segregating the duties of distributing payroll checks and hiring personnel
is to:
A. Separate the custody of assets from the accounting for those assets.
B. Establish clear lines of authority and responsibility.
C. Separate duties within the accounting function.
D. Separate the authorization of transactions from the custody of related assets.
Difficulty: Easy
Source: IIA
16-31
Chapter 16 - Auditing Operations and Completing the Audit
50. A CPA reviews a client's payroll procedures. The CPA would consider internal control to
be less than effective if a payroll department supervisor was assigned the responsibility for:
A. Reviewing and approving time reports for subordinate employees.
B. Distributing payroll checks to employees.
C. Hiring subordinate employees.
D. Initiating requests for salary adjustments for subordinate employees.
Difficulty: Medium
Source: AICPA
51. A common audit procedure in the audit of payroll transactions involves tracing selected
items from the payroll journal to employee time cards that have been approved by supervisory
personnel. This procedure is designed to provide evidence in support of the audit proposition
that:
A. Only bona fide employees worked and their pay was properly computed.
B. Jobs on which employees worked were charged with the appropriate labor cost.
C. Internal control relating to payroll disbursements are operating effectively.
D. Employees worked the number of hours for which their pay was computed.
Difficulty: Medium
Source: AICPA
52. Which of the following material events occurring subsequent to the balance sheet date
would require an adjustment to the financial statements before they could be issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business which is expected to double the sales volume.
D. Settlement of litigation in excess of the recorded liability.
Difficulty: Medium
Source: AICPA
16-32
Chapter 16 - Auditing Operations and Completing the Audit
53. With respect to issuance of an audit report which is dual dated for a subsequent event
occurring after the completion of field work but before issuance of the auditors' report, the
auditors' responsibility for events occurring subsequent to the completion of field work is:
A. Extended to include all events occurring until the date of the last subsequent event referred
to.
B. Limited to the specific event referred to.
C. Limited to all events occurring through the date of issuance of the report.
D. Extended to include all events occurring through the date of submission of the report to the
client.
Difficulty: Medium
Source: AICPA
54. An auditor's decision concerning whether or not to "dual date" the audit report is based
upon the auditor's willingness to:
A. Extend auditing procedures.
B. Accept responsibility for year-end adjusting entries.
C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the
auditor's report.
D. Assume responsibility for resolving all events subsequent to the issuance of the auditor's
report.
Difficulty: Medium
Source: AICPA
55. Auditors often request that the audit client send a letter of inquiry to those attorneys who
have been consulted with respect to litigation, claims, or assessments. The primary reason for
this request is to provide the auditors with:
A. An estimate of the dollar amount of the probable loss.
B. An expert opinion as to whether a loss is possible, probable or remote.
C. Information concerning the progress of cases to date.
D. Corroborative audit evidence.
Difficulty: Hard
Source: AICPA
16-33
Chapter 16 - Auditing Operations and Completing the Audit
56. The auditors' primary means of obtaining corroboration of management's information
concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.
Difficulty: Medium
Source: AICPA
57. Which of the following auditing procedures is ordinarily performed last?
A. Reading of the minutes of the directors' meetings.
B. Confirming accounts payable.
C. Obtaining a management representation letter.
D. Testing of the purchasing function.
Difficulty: Easy
Source: AICPA
58. Which of the following is not correct relating to representation letters?
A. They are ordinarily dated as of the date of the audit report.
B. They are signed by members of top management.
C. They must be obtained for audits.
D. They often serve as a substitute for the application of other procedures.
Difficulty: Medium
59. The date the auditor grants the client permission to use the audit report in connection with
the financial statements is the:
A. Last day of significant field work.
B. Report cutoff date.
C. Report release date.
D. Representation date.
Difficulty: Easy
16-34
Chapter 16 - Auditing Operations and Completing the Audit
60. 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. "Sufficient audit evidence has been made available to the auditor to permit the issuance of
an unqualified opinion."
B. "There are no unasserted claims or assessments that our lawyer has advised us are probable
of assertion and must be disclosed."
C. "We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date that would require
adjustment to, or disclosure in, the financial statements."
Difficulty: Hard
Source: AICPA
61. To which of the following matters would materiality limits not apply when obtaining
written client representations?
A. Violations of state labor regulations.
B. Disclosure of line-of-credit arrangements.
C. Information about related party transactions.
D. Instances of fraud involving management.
Difficulty: Hard
Source: AICPA
62. The auditors' best course of action with respect to "other financial information" included
in a client prepared annual report containing the auditors' report is to:
A. Indicate in the auditors' report, that the "other financial information" is unaudited.
B. Consider whether the "other financial information" is accurate by performing a limited
review.
C. Obtain written representations from managements as to the material accuracy of the "other
financial information."
D. Read and consider the manner of presentation of the "other financial information."
Difficulty: Hard
Source: AICPA
16-35
Chapter 16 - Auditing Operations and Completing the Audit
63. In the course of the audit of financial statements for the purpose of expressing an opinion
thereon, the auditors will normally prepare a schedule of unadjusted differences for which the
auditors did not propose adjustment when they were identified. What is the primary purpose
served by this schedule?
A. To point out to the responsible client officials the errors made by various company
personnel.
B. To summarize the adjustments that must be made before the company can prepare and
submit its federal tax return.
C. To identify the potential financial statement effects of misstatement or disputed items that
were considered immaterial when discovered.
D. To summarize the misstatements made by the company so that corrections can be made
after the audited financial statements are released.
Difficulty: Hard
Source: AICPA
64. An auditor will ordinarily examine invoices from lawyers primarily in order to:
A. Substantiate accruals.
B. Assess the legal ramifications of litigation in progress.
C. Estimate the dollar amount of contingent liabilities.
D. Identify possible unasserted litigation, claims and assessments.
Difficulty: Medium
Source: AICPA
65. The auditor's primary means of obtaining corroboration of management's information
concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.
Difficulty: Medium
Source: AICPA
16-36
Chapter 16 - Auditing Operations and Completing the Audit
Essay Questions
66. Auditors must be concerned with events that occur subsequent to the balance sheet date,
because the events may need to be reflected in the financial statements.
a. Describe the two general types of subsequent events.
b. What is the auditors' responsibility with respect to detecting subsequent events?
c. List three audit procedures that are used by the auditors to search for subsequent events.
a. The two types of subsequent events are:
Type 1--events that provide additional evidence about conditions that existed at the balance
sheet date and affect the estimates included in the statements.
Type 2--events that provide evidence about conditions that arose subsequent to the balance
sheet date and require disclosure in the financial statements.
b. Auditors have a responsibility to search for material subsequent events to the last day of
field work (the date of the auditors' report).
c. Procedures that are used to search for subsequent events include (only three required):
 Review interim financial statements.
 Review minutes of directors' and stockholders' meetings.
 Make inquiries of officers.
 Obtain a letter from the client's attorney.
 Obtain a letter of representations from management.
Difficulty: Medium
16-37
Chapter 16 - Auditing Operations and Completing the Audit
67. Auditors are concerned with the existence of loss contingencies that may affect the client's
financial statements. One way that the auditors obtain evidence about existing loss
contingencies is through the lawyer's letter.
a. Describe the information that the auditors wish to obtain about the litigation being handled
by a lawyer.
b. Describe three other procedures that are used by auditors to discover existing loss
contingencies.
a. The auditors wish to obtain the following information about litigation:
1. A description of the litigation situation and the accounting period to which it relates,
2. The estimated amount of loss, and
3. The probability of occurrence of the loss.
b. Other procedures used by auditors to detect loss contingencies include (only three
required):
 Review the minutes of directors' meetings.
 Review correspondence with financial institutions.
 Obtain a representations letter from the client.
 Review prior tax returns.
Difficulty: Hard
68. The auditors' responsibility for information that accompanies audited financial statements
varies with the nature of the information and the nature of the document.
a. Describe the auditors' responsibility regarding FASB-required supplementary information.
b. Describe the auditors' responsibility regarding other information in client-prepared
documents.
c. Describe the auditors' responsibility regarding information accompanying financial
statements in auditor-prepared documents.
a. The auditors have a responsibility to perform a review of FASB-required supplementary
information, and include an indication in their report when they are unable to perform the
procedures or when they have reservations about the information.
b. The auditors have a responsibility to read other information for inconsistency with
information contained in the financial statements and obvious misstatements. Reservations
with respect to the information may be expressed in the auditors' report.
c. The auditors have a responsibility to report on all information accompanying financial
statements in auditor-prepared documents.
Difficulty: Medium
16-38