ACCT 405 FINAL EXAM | ACTUAL
STUDY SET | QUESTIONS AND
VERIFIED ANSWERS
Reliance on Controls Approach - ANSW-The auditor Will test and rely more upon controls and will
perform fewer substantive tests
Substantive approach - ANSW-Auditors will test and rely less upon controls and will perform more
substantive procedures
Substantiate - ANSW-Auditors gather evidence to support the transactions, account balances, and
disclosures provided by management in the financial statements
Assertions about classes of transactions and events - ANSW-1. Occurence/Cutoff
2. Completeness/Cutoff
3. Accuracy/Classification
Assertions about account balances at year-end - ANSW-1. Existence/Rights and Obligations
2. Completeness
3. Valuation and allocation
Assertions about presentation and disclosure - ANSW-1. Occurence and rights and obligations
2. Completeness
3. Accuracy and valuation/Classification and understandability
Purpose of applying analytical procedures during the overall review stage of an audit - ANSW-1. to
evaluate the overall financial statement presentation
2. to assess the conclusions reached
3. to assist in forming an opinion on whether the financial statements as a whole are free of material
misstatement
Misstatements are more likely to be considered material if they: - ANSW-1. Fact trends and profitability
or mask change in a trend, or change your loss into income
2. Affect the entities compliance with loan covenants, contracts, or regulatory provisions
3. Increase management compensation, indicate a pattern of management bias, or involve fraud or an
illegal activity
Communication to management - ANSW-All my statements, other than those considered trivial, must be
communicated to management on a timely basis to provide management with an opportunity to correct
them
In communication, the auditor should: - ANSW-1. Distinguish between known and likely misstatements
2. Request management to review the situation and make appropriate corrections
Auditor should document the following items: - ANSW-1. The amount below which misstatements are
clearly trivial
2. Misstatements accumulated during the audit and whether they have been corrected
, 3. A summary of uncorrected misstatements, the auditor's conclusion regarding whether such
misstatements caused the financial statements to be materially misstated, and the basis for this
conclusion
Documentation of uncorrected misstatements should include: - ANSW-1. Separate identification of
known and likely misstatements
2. The aggregate effect on the financial statements
Subsequent events - ANSW-Events or transactions that occur after the balance sheet date, but before
the financial statements are issued
Recognized Type 1 Events- Conditions existing on or before the balance sheet date - ANSW-An
adjustment to the financial statements is usually required if the condition existed at the date of the
financial statements
Nonrecognized Type 2 Events- Conditions existing after the balance sheet date - ANSW-significant
business events, such as the purchase of a business or the sale of debenture bonds, occurring
subsequent to the date of the financial statements, require no adjustment to the financial statements,
but may require significant additional disclosure
Auditor's responsibility for subsequent events - ANSW-1. Post balance sheet transactions: review for
proper cut off and to better evaluate year and balances
2. Representation letter should be obtained from management regarding whether any events occurred
during the subsequent period that require adjustments to or disclosure in the financial statements
3. Inquiry
4. Minutes of stockholders, directors, and other committee meetings should be read during the
subsequent period
Inquiry - ANSW-Inquire of management and those charged with governance about whether any
subsequent events have occurred that could affect the financial statements
Contingent Liabilities may arise from many sources, including: - ANSW-1. Pending and threatened
litigation
2. Actual or possible claims and assessments
3. Guarantees of the indebtedness of others
4. Product warranties
5. Income tax disputes
Identifying Contingencies- auditors should perform the following procedures: - ANSW-1. Review the
minutes of meetings of stockholders, board of directors, and other executive committees
2. Review correspondence and invoices from lawyers
for actual or potential litigation, claims, and assessments, the auditor should obtain audit evidence
relevant to: - ANSW-1. the period in which the underlying cause for legal action occurred
2. the degree of probability of an unfavorable outcome
3. the amount or range of potential loss
"Substantial Attention" Limitation - ANSW-Lawyers may limit their responses to matters which they have
given substantial attention
Confidentiality Limitation - ANSW-In some cases, it may be unwise for an attorney to disclose certain
confidential information- Ex. knowledge of a patent violation
STUDY SET | QUESTIONS AND
VERIFIED ANSWERS
Reliance on Controls Approach - ANSW-The auditor Will test and rely more upon controls and will
perform fewer substantive tests
Substantive approach - ANSW-Auditors will test and rely less upon controls and will perform more
substantive procedures
Substantiate - ANSW-Auditors gather evidence to support the transactions, account balances, and
disclosures provided by management in the financial statements
Assertions about classes of transactions and events - ANSW-1. Occurence/Cutoff
2. Completeness/Cutoff
3. Accuracy/Classification
Assertions about account balances at year-end - ANSW-1. Existence/Rights and Obligations
2. Completeness
3. Valuation and allocation
Assertions about presentation and disclosure - ANSW-1. Occurence and rights and obligations
2. Completeness
3. Accuracy and valuation/Classification and understandability
Purpose of applying analytical procedures during the overall review stage of an audit - ANSW-1. to
evaluate the overall financial statement presentation
2. to assess the conclusions reached
3. to assist in forming an opinion on whether the financial statements as a whole are free of material
misstatement
Misstatements are more likely to be considered material if they: - ANSW-1. Fact trends and profitability
or mask change in a trend, or change your loss into income
2. Affect the entities compliance with loan covenants, contracts, or regulatory provisions
3. Increase management compensation, indicate a pattern of management bias, or involve fraud or an
illegal activity
Communication to management - ANSW-All my statements, other than those considered trivial, must be
communicated to management on a timely basis to provide management with an opportunity to correct
them
In communication, the auditor should: - ANSW-1. Distinguish between known and likely misstatements
2. Request management to review the situation and make appropriate corrections
Auditor should document the following items: - ANSW-1. The amount below which misstatements are
clearly trivial
2. Misstatements accumulated during the audit and whether they have been corrected
, 3. A summary of uncorrected misstatements, the auditor's conclusion regarding whether such
misstatements caused the financial statements to be materially misstated, and the basis for this
conclusion
Documentation of uncorrected misstatements should include: - ANSW-1. Separate identification of
known and likely misstatements
2. The aggregate effect on the financial statements
Subsequent events - ANSW-Events or transactions that occur after the balance sheet date, but before
the financial statements are issued
Recognized Type 1 Events- Conditions existing on or before the balance sheet date - ANSW-An
adjustment to the financial statements is usually required if the condition existed at the date of the
financial statements
Nonrecognized Type 2 Events- Conditions existing after the balance sheet date - ANSW-significant
business events, such as the purchase of a business or the sale of debenture bonds, occurring
subsequent to the date of the financial statements, require no adjustment to the financial statements,
but may require significant additional disclosure
Auditor's responsibility for subsequent events - ANSW-1. Post balance sheet transactions: review for
proper cut off and to better evaluate year and balances
2. Representation letter should be obtained from management regarding whether any events occurred
during the subsequent period that require adjustments to or disclosure in the financial statements
3. Inquiry
4. Minutes of stockholders, directors, and other committee meetings should be read during the
subsequent period
Inquiry - ANSW-Inquire of management and those charged with governance about whether any
subsequent events have occurred that could affect the financial statements
Contingent Liabilities may arise from many sources, including: - ANSW-1. Pending and threatened
litigation
2. Actual or possible claims and assessments
3. Guarantees of the indebtedness of others
4. Product warranties
5. Income tax disputes
Identifying Contingencies- auditors should perform the following procedures: - ANSW-1. Review the
minutes of meetings of stockholders, board of directors, and other executive committees
2. Review correspondence and invoices from lawyers
for actual or potential litigation, claims, and assessments, the auditor should obtain audit evidence
relevant to: - ANSW-1. the period in which the underlying cause for legal action occurred
2. the degree of probability of an unfavorable outcome
3. the amount or range of potential loss
"Substantial Attention" Limitation - ANSW-Lawyers may limit their responses to matters which they have
given substantial attention
Confidentiality Limitation - ANSW-In some cases, it may be unwise for an attorney to disclose certain
confidential information- Ex. knowledge of a patent violation
