Ohio State University

ECON 305

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Audit of Litigations, Claims and Assessments

1)The auditor should carry out procedures in order to become aware of any litigation and claims involving the entity which may have a material effect on the financial statements. Such procedures least likely include

1. 1. Making appropriate inquiries of management including obtaining representations
   2. Reviewing board minutes and correspondence with the entity’s lawyers
   3. Examining interest expense accounts
   4. Using any information obtained regarding the entity’s business including information obtained from discussions with any in-house legal department

2. When litigation or claims have been identified or when the auditor believes they may exist, the auditor should
   1. Seek direct communication with the entity’s lawyers
   2. Disclose the litigation and claims in the auditor’s report
   3. Issue unqualified opinion with explanatory paragraph
   4. Issue qualified or adverse opinion

3. The primary source of information to be reported about litigation, claims and assessments is the
   1. Client’s lawyer                     c. Client’s management
   2. Court records                      d. Independent auditor

4. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorney is to provide to auditor with
   1. The probable outcome of asserted claims and pending or threatened litigation
   2. Corroboration of the information furnished by management about litigation, claims and assessments
   3. The attorneys’ opinions of the client’s historical experiences in recent similar litigation
   4. A description and evaluation of litigation, claims and assessments that existed at the balance sheet date

5. The refusal of a client’s lawyer to provide a representation on the legality of a particular act committed by the client is ordinarily
   1. Sufficient reason to issue a “subject to” opinion
   2. Considered to be a scope limitation
   3. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of confidentiality
   4. Proper grounds to withdraw from the management

Initial Engagements – Opening Balances

6. Opening balances means those account balances which exist at the beginning of the period. These are based upon the closing balances of the prior period and reflect the effects of:

1. Current transactions (e.g. stock dividends) that will be given retroactive effect recognition
2. Transactions of prior periods
3. Accounting policies applied in the prior period

1. All of these                           c. I only
2. I and II                                  d. II and III

7. For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:
   1. The opening balances do not contain misstatements that materially affect the current period’s financial statements
   2. The prior period’s closing balances have been correctly brought forward to the current period or
   3. Appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed
   4. All of the above

8. Which of the following accounts is more difficult for the auditor to be satisfied as to the balance at the beginning of the period?
   1. Accounts receivable             c. Inventory
   2. Accounts payable                 d. Accrued interest payable

9. If, after performing necessary audit procedures, the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances, the auditor’s report should include:

1. A qualified opinion
2. A disclaimer of opinion
3. An opinion which is qualified or disclaimed regarding the results of operations and cash flows; and unqualified regarding financial position

1. Any of the above                  c. Either I or II
2. None of the above               d. I only

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10. If the opening balances contain misstatements which could materially affect the current period’s financial statements and the effect of the misstatement is not properly accounted for and adequately disclosed, the auditor should express a

1. Unqualified opinion with explanatory paragraph   c. Qualified or disclaimer of opinion
2. Qualified or adverse opinion                                  d. Adverse or disclaimer of opinion

Audit of Accounting Estimates

11. It means an approximation of the amount of an item in the absence of a precise means of measurement

1. Accounting estimate                        c. Accounting error
2. Accounting policy                            d. Accounting change

12. The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate:

1. Review and test the process used by management to develop the estimate
2. Use an independent estimate for comparison with that prepared by management
3. Review subsequent events which confirm the estimate made

1. Any of the above                              c. Either I and II
2. None of the above                           d. I only

13. In evaluating the assumption on which the estimate is based, the auditor would need to pay particular attention to assumptions which are

1. Reasonable in light of actual results in prior periods
2. Consistent with those used for other accounting estimates
3. Consistent with management’s plans which appear appropriate
4. Subjective or susceptible to material misstatement

14. Which statement is incorrect regarding the auditor’s responsibilities and audit procedures regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements?

1. The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements
2. An audit cannot be expected to detect all related party transactions
3. The auditor is responsible for the identification and disclosure of related parties and transactions with such parties
4. The auditor needs to have a level of knowledge of the entity’s business and industry that will enable identification of the events, transactions and practices that may have a material effect on the financial statements

15. When auditing related-party transactions, an auditor places primary emphasis on

1. Confirming the existence of the related parties
2. Verifying the valuation of the related-party transactions
3. Evaluating the disclosure of the related-party transactions
4. Ascertaining the rights and obligations of the related parties

16. Which of the following least likely indicates the existence of previously unidentified related parties?

1. Transactions which have abnormal terms of trade., such as unusual prices, interest rates, guarantees and repayment terms
2. Transactions which lack an apparent logical business reason for their occurrence
3. Transactions in which substance does not differ from form
4. Unrecorded transactions such as the receipt or provision of management services at no charge

Other Audits/ Audit of Group of FS – PSA 600

1. Principal auditor is
   1. The auditor who audited and reported on the prior period’s financial statements and continues as the auditor for the current period
   2. A current period’s auditor who did not audit the prior period’s financial statements
   3. The auditor who was previously the auditor of an entity and who has been replaced by an incoming auditor
   4. The auditor with responsibility for reporting on the financial statements of an entity when those financial statements include financial information of one or more components audited by another auditor

2. When using the work of another auditor, the principal auditor should ordinarily perform the following procedure
   1. Obtain information regarding the professional competence of the other auditor in the context of the specific assignment undertaken by the other auditor
   2. Advise the other auditor of the applicable independence requirements as regards both the entity and the competent and obtain representation as to his compliance with them
   3. Advise the other auditor of the applicable accounting, auditing and reporting requirements and obtain representation as to compliance with them
   4. All of the above

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3. When part of the examination is to be performed by another auditor, the principal auditor may decide to assume responsibility for the other auditor’ work and make no reference to such work when:
   1. The portion examined by the other auditor is material to the financial statements audited by the principal auditor
   2. The other auditor is not a correspondent of the principal auditor
   3. It is impracticable for the principal auditor to review the other auditor’s work
   4. The other auditor was retained by the principal auditor and worked under his supervision

Internal Auditing – PSA 610

1. The independent auditor should acquire an understanding of a client’s internal audit function to determine whether the work of internal auditors will be a factor in determining the nature, timing and extent of the independent auditor’s procedures. The work performed by internal auditors might be such a factor when the internal auditor’s work includes
   1. Verification of the mathematical accuracy of invoices
   2. Review of administrative practices to improve efficiency and achieve management objectives
   3. Study and evaluation of internal accounting control
   4. Preparation of internal financial reports for management purposes

2. Certain aspects of internal auditing may be useful to the external auditor in determining:

3. The work of internal auditors may affect the independent auditor’s

1. Procedures performed in obtaining an understanding of internal control
2. Procedures performed in assessing the risk of material misstatement
3. Substantive procedures performed in gathering direct evidence

1. I and III only                         c. II and III only
2. I and II only                          d. I, II and III

5. When obtaining an understanding and performing a preliminary assessment of the internal audit function, the important criteria include the following, except
   1. Organization status             c. Due professional care
   2. Scope of function                 d. Authority over operations

6. When assessing an internal auditor’s objectivity, an independent auditor should
   1. Evaluate the adequacy of the internal auditor programs
   2. Inquire about the internal auditor’s educational background and professional certification
   3. Consider the organizational level to which the internal auditor reports
   4. Review the internal auditor’s working papers

7. To make the internal auditor independent, he should report directly to the:
   1. Board of directors               c. Stockholders
   2. Management                       d. Controller

8. If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, he should consider the auditor’s efficiency and experience

If the independent auditors decide that the work performed by the internal auditor may have a bearing on their procedures, he should consider the auditor’s competence and objectivity

1. 1. False, False                          c. False, True
   2. True, False                           d. True, True

Experts – PSA 620

1. An expert may be
   1. Employed by the auditor     c. Engaged by the auditor
   2. Employed by the entity       d. All of the above

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2. Which of the following is not a specialist upon whose work an auditor may rely?
   1. Lawyer                                 c. Actuary
   2. Internal auditor                   d. Appraiser

3. Which of the following statements is correct concerning an auditor’s use of the work of an expert?
   1. The auditor need not obtain an understanding of the methods and assumptions used by the expert
   2. The auditor may not use the work of an expert in matters material to the fair presentation of the financial statements
   3. The reasonableness of the expert’s assumptions and their applications are strictly the auditor’s responsibility
   4. The work of an expert who has a contractual relationship with the client may be acceptable under certain circumstances

4. When planning to use the work of an expert, the auditor should assess the professional competence of the expert. This will involve considering the expert’s:

1. Professional certification or licensing by, or membership in, an appropriate professional body
2. Experience and reputation in the field in which the auditor is seeking audit evidence
3. Relationship to the entity

1. I, II and III                             c. I and III
2. I and II                                  d. I only

5. When an auditor intends to use the work of an expert in an audit engagement:

1. He should refer to the work of the expert in his report to indicate the division of responsibility
2. He does not perform additional procedures since the expert’s report constitute sufficient audit evidence
3. He is not concerned with the objectivity of the expert
4. He simply relies on the expert’s assumptions and methods

1. All of the above statements are true          c. Only statements II and IV are true
2. Only statements I and III are true               d. All of the above statements are false

Analytical Procedures – PSA 520

1. The analysis if significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts.
   1. Audit evidence                                 c. Audit planning
   2. Analytical procedures                      d. Audit sampling

2. Analytical procedures are used for the following purposes, except
   1. As risk assessment procedure
   2. As a test performed to obtain audit evidence about the suitability of design and effective operation of the accounting and internal control systems
   3. As substantive procedures when their use can be more effective or efficient than tests of details in reducing detection risk for specific financial statement assertions
   4. As an overall review of the financial statements in the final review stage of the audit

3. The auditor uses analytical review during the course of an audit. The most important of this review is the
   1. computation of key ratios such as inventory turnover and gross profit percentages
   2. investigation of significant variations and unusual relationships
   3. comparison of client-computed statistics with industry data on a quarterly and full-year basis
   4. examination of the client data that generated the statistics that are analyzed

4. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following, except
   1. Comparison of financial data with data for comparable prior periods, anticipated results (e.g. budgets and forecasts), and similar data for the industry in which the entity operates
   2. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity’s experience
   3. Study of the relationships of financial data with relevant nonfinancial data.
   4. Tracing transactions through the system to determine whether procedures are being applied as prescribed

5. Which of the following is not a typical analytical review procedure?
   1. Study of relationships of financial information with relevant nonfinancial information
   2. Comparison of financial information with similar information regarding the industry in which the entity operates
   3. Comparison of recorded amounts of major disbursements with appropriate invoices
   4. Comparison of recorded amounts of major disbursements with budgeted amounts

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6. Analytical procedures used as part of risk assessment procedures should focus on identifying
   1. material weakness in the internal control structure
   2. the predictability of financial data from individual transactions
   3. the various assertions that are embodied in the financial statements
   4. areas that may represent specific risks relevant to the audit

7. Analytical procedures used as substantive procedure focus on
   1. Understanding the business and in identifying areas of potential risk
   2. Detecting material misstatements in the financial statements
   3. Obtaining audit evidence about the suitability of design and effective operation of the accounting and internal control systems
   4. Whether the financial statements as a whole are consistent with the auditor’s knowledge of the business

8. Analytical procedures used in the overall review stage of an audit generally include
   1. Considering unusual or unexpected account balances that were not previously identified
   2. Performing tests of transactions to corroborate management’s financial statement assertions
   3. gathering evidence concerning account balances that have not changed from the prior year
   4. Retesting controls that appeared to be ineffective during the assessment of control risk

9. The primary objective of analytical procedures used in the final review stage of an audit is to
   1. Obtain evidence from details tested to corroborate particular assertions
   2. Identify areas that represent specific risks relevant to the audit
   3. Assist the auditor in assessing the validity of the conclusions reached
   4. Satisfy doubts when questions arise about a client’s ability to continue in existence

10. The investigation of unusual fluctuations and relationships ordinarily begins with

1. Identification of significant fluctuations and relationships that are inconsistent with other relevant information or that deviate from predicted amounts
2. Inquiries of management
3. Comparing management’s responses with the auditor’s knowledge of the business and other evidenced obtain during the course of the audit
4. Consideration of the need to apply other audit procedures

11. The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to provide an acceptable explanation, the auditor should

1. Withdraw from the engagement
2. Consider the matter a scope limitation
3. Perform additional audit procedures to investigate the matter further
4. Intensify the examination with the expectation of detecting management fraud

Communication with those charged with governance

1. Which of the following statements is correct concerning an auditor’s required communication with an entity’s audit committee?
   1. This communication is required to occur before the auditor’s report on the financial statements is issued
   2. This communication should include discussion of any significant disagreements with management concerning the financial assertions
   3. Any significant matter communicated to the audit committee also should be communicated to management
   4. Significant audit adjustments proposed by the auditor and reported by management need not be communicated to the audit committee

2. Which statement is incorrect regarding the auditor’s communications of audit matters with those charged with governance?
   1. The auditor’s communications of matters include all audit matters of governance interest
   2. An audit of financial statements is not designed to identify all matters that may be relevant to those charged with governance
   3. The auditor’s communications with those charged with governance may be made orally or in writing
   4. None of the above

3. Which of the following statements is correct concerning significant deficiencies in an audit?
   1. An auditor is required to search for significant deficiencies during an audit
   2. All significant deficiencies are also considered to be material weaknesses
   3. An auditor may communicate significant deficiencies during an audit or after the audit’s completion
   4. An auditor may report that no significant deficiencies were noted during an audit

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