UNIT 3 - D251 ADVANCED AUDITING |66 QUESTIONS AND ANSWERS.

Known misstatements are those that the auditor has specifically identified and about which there is no doubt; they are also known as factual misstatements. True Even if immaterial, an intentional misstatement may cause serious difficulties in the audit, and for the client. True The auditor discovers various errors in the client's financial statements during the audit. At the end of the audit, the auditor analyzes these misstatements to determine if the client needs to correct them. In which of the following situations could management and the auditor decide not to correct the misstatement? a. If, by correcting the misstatements, net income would increase rather than decrease. b. If, by correcting the misstatements, net income would decrease rather than increase. c. d. If the misstatements, in the aggregate, are immaterial. Which of the following statements is false? a. Management's incentives may bias their willingness to book, or correct, detected misstatements. b. Known misstatements are those that arise from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate. c. Section 10A(b) of the Exchange Act requires auditors to take action upon discovery of an ille b. Known misstatements are those that arise from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate. The auditor is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for loss contingencies; management is responsible for determining that the auditor has properly identified, accounted for, and disclosed material loss contingencies. False One important primary source of evidence concerning loss contingencies is the client's management; a primary source of corroborative evidence concerning contingencies is the client's legal counsel, which provides the management representation letter. False In obtaining evidence about loss contingencies, which of the following are sources of evidence that the auditor should obtain from management? a. A description and evaluation of contingencies that existed at the balance sheet date. b. Assurance that the accounting and disclosure requirements concerning contingent liabilities have been met. c. Documentation of communication with internal and external legal counsel of the client. d. All of the above. d. All of the above. In completing the audit, the auditor obtains a letter of audit inquiry. Which of the following is an accurate description of a letter of audit inquiry? a. A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which is received from the client's legal counsel. b. A letter that is the primary source of corroborative evidence concerning cash valuation, which is received from the client's bank. c. A letter that is the primary source of corro a. A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which is received from the client's legal counsel. Management can provide disclosures on the face of the financial statements, or in the notes to the financial statements. True OAO Gazprom is a natural gas producer in Russia; top management used their power to siphon profits out of Gazprom and into their own pockets. In its filings, the company did not disclose many specific details about its related party transactions. True In completing the audit, the auditor should review the adequacy of the disclosures in the financial statements. When assessing the disclosures, the auditor should have reasonable assurance about which of the following? a. The disclosed events and transactions have occurred and pertain to the entity. b. All the disclosures that should have been included are included. c. The disclosures are understandable to users. d. All of the above. d. All of the above. Which of the following statements is false? a. Disclosure checklists are a convenient documentation format for evidence that the auditor adequately evaluated management's assertions about the adequacy of its disclosures. b. The auditor's report, and assurance therein, covers mandatory disclosures in the basic financial statements and the related notes, along with voluntary disclosures in the MD&A. c. When assessing the adequacy of disclosures, the auditor should have reasonable assurance that b. The auditor's report, and assurance therein, covers mandatory disclosures in the basic financial statements and the related notes, along with voluntary disclosures in the MD&A. Auditing standards recognize that there are inherent limitations in an auditor's ability to detect material misstatements relating to an organization's compliance with laws and regulations. True The legal implications of a client's noncompliance with laws and regulations are ultimately a matter for the auditor to resolve before the auditor can issue the audit opinion. False The auditor has responsibility regarding a client's noncompliance with laws and regulations. Management may try to hide acts involving noncompliance, which limits the auditor's ability to detect such acts. Which of the following are inherent limitations that affect the auditor's ability to detect acts involving noncompliance? a. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements, so the information systems relatin d. All of the above. Which of the following is an important provision of the Foreign Corrupt Practices Act? a. Auditors of clients operating in foreign countries must hire a joint auditor in the foreign country to provide assurance that laws and regulations have been followed by the client. b. Auditors of clients operating in foreign countries must provide reasonable assurance that any inventory observations that occur in the foreign country are observed by at least some audit personnel from the U.S.; this require c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and must design and maintain an adequate system of internal accounting controls. Review analytics should corroborate conclusions formed during the audit, thereby enabling the auditor to draw conclusions upon which to base the audit opinion. True The auditor's expectations when performing review analytical review can be less precise than those for substantive analytics. True