Principles of Auditing & Other Assurance Services Chapter 16 Exam Questions and Correct Answers (Rated A+)

Principles of Auditing & Other Assurance Services Chapter 16 Exam Questions and Correct Answers (Rated A+) Analytical procedures - Answers Evaluations of financial information made by a study of plausible relationships between financial and nonfinancial information. Commitment - Answers A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements. Conservatism - Answers An accounting doctrine for asset valuation in which the lower of two alternative acceptable asset valuations is chosen Contingent liability - Answers A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event. Date of the financial statements - Answers The date of the end of the latest period covered by the financial statements (e.g., date of the balance sheet). Disclosure checklist - Answers A list of specific disclosures required by the FASB, the GASB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosures in a set of financial statements. Emphasis-of-matter paragraph and other-matter paragraph - Answers A paragraph included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements. General risk contingency - Answers An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements. Iron curtain approach - Answers An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. For example, if expenses were understated by $20,000 in the previous year and $45,000 during the current year, the iron curtain method would quantify the misstatement as $65,000. Also see rollover approach. Known misstatements - Answers Specific misstatements identified by the auditors during the course of the audit. Letter of inquiry of the client's lawyer - Answers A letter sent by auditors to a client's legal counsel requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies. The returned letter from the lawyer is referred to as the lawyer's letter. Likely misstatements - Answers Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates. Loss contingency - Answers A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. Loss contingencies should be disclosed in notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When loss contingencies are considered probable and can be reasonably estimated, they should be accrued in the accounts. Minutes - Answers A formal record of the issues discussed and actions taken in meetings of stockholders and the board of directors.