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.
(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.
