COMPLETING THE AUDIT

1. Which of the following analytical procedures would an auditor most likely perform to
test the reasonableness of recorded expenses?
a. Comparing current with prior year actual accounts payable.
b. Comparing current year budgeted payroll expense with current year actual accrued
liabilities.
c. Comparing current and prior year budgeted sales revenue.
d. Comparing current with prior year payroll expense.
2.Subsequent events regarding conditions that did not exist as of the balance sheet date, also
referred to as Type II subsequent events, require:
a. additional disclosure in the financial statements.
b. additional evidence regarding events that occurred prior to the balance sheet date.
c. adjustment to the financial statements.
d. modification of the audit report.
3.If a client's outside attorney refuses to respond to an auditor's letter of legal inquiry, the auditor
has:
a. no grounds to modify the audit report because of the attorney-client privilege.
b. sufficient grounds to withdraw from the engagement.
c. sufficient grounds to consider the refusal as a limitation on the scope of the audit.
d. sufficient grounds to issue an adverse opinion.
4.In forming an opinion at the end of the audit, the engagement partner will:
a. inquire of management about accounting principles used.
b. review audit working papers.
c. discuss the audit plan with members of the audit team.
d. consider whether the audit was completed within budget.
5.When there is a subsequent discovery of omitted procedures, although the financial statements
are fairly presented, the auditor may not have met due diligence requirements. The auditor:
a. is under no obligation to perform addition audit procedures.
b. must contact the client and perform the omitted procedures.
c. must notify the SEC of the omitted procedures.
d. immediately resign from the engagement.
6.Which of the following would not necessarily be a related-party transaction?
a. Transactions with another company that has a similar name.
b. Transactions between companies under common ownership.
c. A loan to the company from the majority shareholder.
d. Purchase of assets from a company owned by the spouse of the company's president.
7.The management representation letter to the auditor should include all of the following except:
a. a statement by management that no illegal activities by employees have occurred.
b. a statement by management that all evidence has been made available to the auditor.

c. a statement by management that the financial statements are presented in conformity with
GAAP.
d. a statement by management that all related-party transactions were for legitimate business
purposes.
8.In the audit of revenue and expense accounts, extensive tests of details rather than analytical
procedures are appropriate when:
a. control risk is below maximum.
b. transaction volume is high.
c. analytical procedures reveal nothing unusual.
d. an account requires special attention.
9.Which of the following circumstances would qualify as subsequent discovery of facts that
existed at the date of the auditor's report?
a. A material lawsuit against the client, properly accounted for in the financial statements,
concluded with a judgment in the client's favor ten days after the date of the auditor's report.
b. The client entered into negotiations to acquire another company five days after the date of
the auditor's report. The acquisition was completed 45 days later.
c. Related party transactions in the year under audit involving the client and a major
customer were discovered 15 days after the date of the auditor's report.
d. A tornado destroyed client's headquarters building two days after the date of the auditor's
report.
10. Assertions most relevant to revenue and expense accounts include all of the following except:
a. occurrence and valuation.
b. completeness and allocation.
c. rights and occurrence.
d. disclosure and presentation.
11. The client's attorney may properly limit his/her communication with the auditor.
12. A primary source of information concerning possible loss contingencies is discussions with
management.
13. Related-party transactions are significant because the legal form of the transaction may not
accurately reflect its economic substance.
14. Type I subsequent events require adjustment to the financial statements.
15. Matters communicated to the audit committee at the end of the engagement include
discussion of the quality of management's accounting principles.