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What step do auditors take during phase IV of the audit regarding financial statements?

  • Evaluate overall presentation for compliance with accounting standards. (correct)
  • Assess the risk of material misstatement.
  • Perform tests of controls related to disclosures.
  • Review only current assets and liabilities.

When an auditor reviews asset classification, which audit objective is not being satisfied?

  • Rights and obligations.
  • Existence and completeness.
  • Presentation and disclosure. (correct)
  • Valuation and allocation.

In which phase do auditors determine the need for additional procedures for presentation and disclosure-related objectives?

  • Phase II
  • Phase IV (correct)
  • Phase I
  • Phase III

How does obtaining evidence for presentation objectives differ from transaction-related objectives?

<p>There is no difference in approach. (C)</p> Signup and view all the answers

What misconception may arise about auditors' control tests when control risk is below maximum?

<p>Auditors may decide not to conduct tests of controls. (C)</p> Signup and view all the answers

Which of the following concepts is true regarding the auditor's evaluation of evidence in phase IV?

<p>Past evidence is essential for determining the need for additional testing. (D)</p> Signup and view all the answers

What is typically integrated with the auditor's tests for transaction-related objectives?

<p>Procedures for presentation objectives. (C)</p> Signup and view all the answers

Which statement is true regarding auditors' risk assessment concerning footnote disclosure?

<p>Auditors set the risk as low for complete footnote disclosures. (D)</p> Signup and view all the answers

What is the first condition required for a contingent liability to exist?

<p>There is potential for future payment to an outside party or impairment of an asset. (B)</p> Signup and view all the answers

Which term describes a situation where the chance of occurrence is slight?

<p>Remote (A)</p> Signup and view all the answers

What action is required if an amount related to a probable contingent liability cannot be reasonably estimated?

<p>A footnote disclosure is necessary. (B)</p> Signup and view all the answers

Which of the following is NOT a type of contingency an auditor might be concerned with?

<p>Insurance claims (C)</p> Signup and view all the answers

In the context of contingent liabilities, what does the term 'reasonably possible' signify?

<p>The chance of occurring is more than remote, but less than probable. (D)</p> Signup and view all the answers

Which of the following is an example of a contingency that would require footnote disclosure?

<p>Pending patent infringement lawsuits (B)</p> Signup and view all the answers

When determining the proper accounting treatment for an environmental clean-up lawsuit, what is the auditor's first step?

<p>Evaluate if a contingency exists. (B)</p> Signup and view all the answers

What describes the likelihood of occurrence that necessitates no disclosure in financial statements?

<p>Remote (C)</p> Signup and view all the answers

What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities?

<p>The attorneys refuse to disclose information they consider confidential. (D)</p> Signup and view all the answers

What opinion must an auditor give if they cannot determine the effect of a subsequent event on internal control effectiveness?

<p>Unqualified opinion (A)</p> Signup and view all the answers

An attorney is aware of a violation of a patent agreement that could result in significant loss to the client. What does this scenario illustrate?

<p>Unasserted claim. (C)</p> Signup and view all the answers

Which action should an auditor primarily take to corroborate information regarding litigation provided by management?

<p>Consult with the client's legal counsel. (D)</p> Signup and view all the answers

Which of the following is an example of a nonrecognized subsequent event that may require disclosure?

<p>Issuance of bonds (C)</p> Signup and view all the answers

In response to a major customer's bankruptcy declared on March 1, 2019, what action should the auditor take regarding the December 31, 2018 financial statements?

<p>Adjust the financial statements (B)</p> Signup and view all the answers

What is a potential consequence if an attorney withholds information regarding a contingent liability?

<p>Misrepresentation of the company's financial health. (B)</p> Signup and view all the answers

What action is appropriate for the sale of machinery at book value on February 17, 2019?

<p>No action is required (D)</p> Signup and view all the answers

Which of the following describes a situation where a client is unaware of a potential legal claim that could arise in the future?

<p>Unasserted claim. (A)</p> Signup and view all the answers

How should the loss of uninsured inventory in a flood on February 20, 2019 be reported?

<p>Disclose the information in a footnote (A)</p> Signup and view all the answers

What is the auditor's primary concern when reviewing claims and litigation disclosed by management?

<p>The estimated financial impact of claims. (A)</p> Signup and view all the answers

What type of event is characterized by a situation that has occurred and is disclosed after the balance sheet date?

<p>Subsequent event. (A)</p> Signup and view all the answers

What should be done regarding the significant decline in market value of securities held for resale after January 5, 2019?

<p>Disclose the information in a footnote (A)</p> Signup and view all the answers

If management has provided complete information on potential lawsuits, what should the auditor ensure next?

<p>Obtain a letter from the client's attorney. (D)</p> Signup and view all the answers

What course of action is necessary when a company settles a lawsuit for a higher amount than previously recorded on March 10, 2019?

<p>Adjust the financial statements (D)</p> Signup and view all the answers

If an event occurs after the balance sheet date that reflects a material weakness in internal control, what must an auditor evaluate?

<p>The effectiveness of the control as of year-end (D)</p> Signup and view all the answers

Auditors of public companies must obtain certain representations from management regarding what aspect of financial reporting?

<p>Internal control over financial reporting (A)</p> Signup and view all the answers

At the completion of an audit, management is typically asked to make a written statement regarding:

<p>Status of contingent liabilities (A)</p> Signup and view all the answers

Which statement about the letter of representation is accurate?

<p>It is prepared on the CPA firm's letterhead. (C)</p> Signup and view all the answers

What is the implication if a client refuses to sign the letter of representation?

<p>The auditor will issue a qualified opinion or disclaimer. (C)</p> Signup and view all the answers

Why is a management representation letter considered unreliable evidence?

<p>It comes from a nonindependent source. (D)</p> Signup and view all the answers

Data analytics at the end of the audit helps auditors to identify:

<p>Unusual journal entries requiring additional consideration. (D)</p> Signup and view all the answers

What must the letter of representation typically include regarding internal control?

<p>An acknowledgment of management's responsibility. (B)</p> Signup and view all the answers

Which of the following is NOT a typical consequence if a management representation letter is not signed?

<p>Automatic acceptance of all audit findings. (D)</p> Signup and view all the answers

Who is primarily responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities?

<p>Management (B)</p> Signup and view all the answers

What is the appropriate financial statement treatment for a potential loss with a 40% probability of resulting in a $10 million payment?

<p>Disclose a liability with a range of outcomes (B)</p> Signup and view all the answers

Which of the following is a contingent liability that auditors are particularly concerned about?

<p>Notes receivable discounted and product warranties (A)</p> Signup and view all the answers

Audit procedures concerning contingent liabilities are initially focused on which aspect?

<p>Completeness (A)</p> Signup and view all the answers

If management assesses that a contingent liability has a 30% chance of occurrence, what should be the treatment in financial statements?

<p>Record no liability or disclosure (A)</p> Signup and view all the answers

In assessing planned audit procedures related to contingent liabilities, which factor plays a significant role?

<p>Nature of the contingent liability (B)</p> Signup and view all the answers

Which statement best describes a contingent liability?

<p>A liability that depends on the outcome of future events. (D)</p> Signup and view all the answers

What happens if the chance of occurrence for a contingent liability is deemed remote?

<p>It can be ignored as immaterial. (B)</p> Signup and view all the answers

Flashcards

Presentation and disclosure audit objective

Ensuring financial statements and footnotes comply with accounting standards.

Phase IV of audit

The final audit phase where presentation and disclosure are evaluated.

Audit evidence for presentation & disclosure

Evidence gathered to confirm presentation compliance, like classification of assets.

Integrating presentation tests

Combining presentation procedures with other audit testing to save time and effort.

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Contingent liabilities and subsequent events

Potential future obligations or events that might affect financial statements.

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Occurrence and rights & obligations

Audit objective ensuring assets/liabilities exist, are owned, and documented correctly.

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Initial Control Risk Assessment

Auditor's first estimate of the risk of incomplete financial disclosures.

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Evidence for disclosure objectives

Evidence obtained to ensure disclosures in footnotes are complete and correct.

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Contingent Liability

A potential obligation that may or may not arise based on a future event. The existence depends on uncertain future events

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Recording/disclosing contingent liabilities

Management's responsibility to identify and decide on the appropriate treatment for recording or disclosing potential obligations

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Potential loss for noncompliance

A possible financial loss due to not meeting environmental rules or regulations.

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Financial statement treatment for potential loss

Disclosing a potential liability and providing a range of possible outcomes when there's a chance of loss due to noncompliance

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Contingent liability concern for auditor

Auditors are typically concerned about product warranties and other similar potential obligations.

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Audit procedures for contingent liabilities

Initial audit focus on whether contingent liabilities are complete and correctly reported

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Auditors Responsibility for contingent liability

Auditors should confirm that Management has correctly identified all potential liabilities and disclose them appropriately

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Probability of risk

Assessment of the likelihood that a potential risk will occur

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Contingent Liability Conditions

Three key conditions are needed for a contingent liability: 1. Possible future payment or asset impairment, 2. Uncertainty about the exact amount, 3. Outcome dependent on future events.

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Contingency Likelihood - Probable

High likelihood of an event occurring, and the amount can be reasonably estimated, and this requires a corresponding financial statement adjustment. If not estimable, footnote disclosure is needed.

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Contingency Likelihood - Reasonably Possible

More likely than not, but less certain than Probable. Requires footnote disclosure.

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Contingency Likelihood - Remote

Very low chance of an event occurring. No disclosure needed.

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Auditor Concern - Contingencies

Auditors are concerned about several types of contingencies, Including litigation, tax disputes, and product warranties.

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Environmental Clean-up Lawsuit

Contingency situations, which may involve an environmental clean-up lawsuit, necessitates an accounting determination to see if it constitutes a contingent liability.

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Types of Contingencies

Contingencies that are of concern to auditors include litigation, tax disputes, product warranties, and other obligations.

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Attorney Confidentiality

Attorneys may refuse to disclose information considered confidential.

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Unasserted Claim

A potential legal claim that hasn't been formally presented.

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Standard Inquiry to Client's Attorney

A letter sent by auditors to the client's attorney to gather information about potential legal issues.

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Auditor's Corroboration

Actions taken by the auditor to verify information provided by management regarding litigation, claims, and assessments

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Patent Violation

A breach of a patent agreement, which might lead to financial losses for the client.

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Litigation

A legal dispute or case between parties.

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Independent Auditor

A professional who examines financial statements to ensure accuracy and compliance.

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Subsequent event

An event that occurs after the balance sheet date but before the financial statements are issued.

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Recognized subsequent event

An event that requires adjusting the financial statements because it has a material impact on the company's financial position.

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Non-recognized subsequent event

An event that requires disclosure in the footnotes but does not change the financial statements.

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Material weakness in internal control

A deficiency in internal control that could allow a material misstatement to go undetected.

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Adverse opinion on internal control

An auditor's opinion stating that the company's internal control over financial reporting is ineffective.

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Issuance of bonds or equity securities

A non-recognized subsequent event that requires disclosure in the footnotes.

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Fieldwork for audit

The period during which an auditor conducts procedures to gather evidence about the financial statements.

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Subsequent event after fieldwork

An event that occurs between the end of fieldwork and the issuance of the audit report.

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Letter of Representation

A written statement from management to the auditor, confirming key assertions about financial reporting.

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Representations from Management

Statements provided by management to the auditor regarding the completeness and accuracy of financial information and internal controls.

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Completion of Audit

The final stage of the audit process where the auditor has gathered all necessary evidence and evaluated the financial statements.

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Undisclosed Contingent Liabilities

Potential obligations that might arise in the future, which management has not yet disclosed.

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Letter of Representation (required content)

Does NOT include details about management's planned solutions to internal control weaknesses.

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Letter of Representation (importance)

It is crucial for auditors to obtain a letter of representation. Without it, they may have to issue a qualified or disclaimer opinion.

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Client Representation Letter (reliability)

While it's a written statement, it's considered less reliable than evidence gathered independently by the auditor.

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Data Analytics in Audit

Using software to analyze large amounts of data, such as journal entries, to identify potential issues requiring further investigation.

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