Exercise:

1. Which of the following is not among the characteristics of the procedures performed in
completing the audit?
a) They are optional since they have only an indirect impact on the opinion to be
expressed.
b) They involve many subjective judgments by the auditor
c) They are performed after the balance sheet date.
d) They are usually performed by audit managers or other senior members of the audit
team who have extensive audit experience with the client.

2. An auditor has the responsibility to actively search for subsequent events that occur
subsequent to the:
a) Balance sheet date
b) Date of the auditor’s report
c) Balance sheet date, but prior to the audit report
d) Date of the management representation letter

3. “Subsequent events” for reporting purposes are events which occur subsequent to the
a) Financial statement data
b) Date of the auditor’s report
c) Financial statement date but prior to the date of the auditor’s report
d) Date of the auditor’s report and concern contingencies which are not reflected in
the financial statements

4. The primary source of information about litigation, claims and assessments is obtained
by auditors from the:
a) Client’s lawyers
b) Client’s management
c) Client’s previous auditor
d) All of the above

5. At the completion of the audit, management is asked to make a written statement that
it is not aware of any undisclosed contingent liabilities, this statement would appear in
the:
a) Management letter
b) Letter of inquiry
c) Letters testamentary
d) Written management representation

6. Which of the following statements about a written representation is not correct?

a) It is optional
b) It is addressed to the auditor
c) It confirms oral representation made by management
d) It’s date normally coincides with the date of the audit report
7. A purpose of a management representation letter is to reduce
a) Audit risk to an aggregate level of misstatement that could be considered material
b) An auditor’s responsibility to detect material misstatements only to the extent that
the letter is relied on
c) The possibility of misunderstanding concerning management’s responsibility for the
financial statements.
d) The scope of an auditor’s procedures concerning related party transactions and
subsequent events.

8. The date of the management representation letter should coincide with the date of the
a) Balance sheet
b) Latest interim financial statements
c) Auditor’s report
d) Latest related party transactions

9. A client representation letter is:

a) Prepared on the CPA’s letterhead
b) Addressed to the client
c) Signed by high-level officals (e.g., the president and chief financial officer).
d) Dated as of the client’s year-end

10. PSA 570 requires the auditor to evaluate whether there is a substantial doubt about a
client’s ability to continue as a going concern for at least:
a) One quarter beyond the balance sheet date
b) One quarter beyond the date of the auditor’s report
c) One year beyond the balance sheet date
d) One year beyond the date of the auditor’s report

11. If, on the basis of the additional procedures carried out and the information obtained,
including the effect of mitigating circumstances, the auditor’s judgment is that the
entity will not be able to continue as a going concern, the financial statements should be
prepared using and appropriate basis; otherwise the auditor will issue a(n)
a) Disclaimer opinion
b) Qualified opinion
c) Adverse opinion
d) Unmodified opinion with emphasis of matter paragraph

12. Most auditors assess inherent risk as high for related parties and related-party
transactions because
a) Of the accounting disclosure
b) Of the lack of independence between parties
c) Both A and B
d) It is required by generally accepted accounting principles
13. The least effective method of identifying related parties would be
a) An inquiry of management
b) A review of SEC filings
c) A review of the purchases and sales journals for the period under audit
d) An examination of stockholders’ listings to identify principal stockholders

14. Which of the following is not considered a related party?

a) Affiliated companies
b) Principal owners of the company
c) Line employees of the company
d) Members of company management

15. Related parties are commonly identified in which of the following ways?
a) Review of SEC filings
b) Examination of stockholder listings
c) Inquiry of management
d) All of the above

16. An auditor should examine minutes of the board of director’s meetings

a) Through the date of the financial statements
b) Through the date of the audit report
c) Only at the beginning of the audit
d) On a test (sample) basis

17. The corporate minutes are the official record of the meetings of the board of directors
and stockholders. The minutes typically include authorizations related to which of the
following?
a) Significant acquisition of property, plant and equipment
b) Dividend payment
c) Corporate officer compensation
d) All of the above

18. When considering the objectivity of internal auditors, an independent auditor should
a) Evaluate the quality control program in effect for the internal auditors
b) Examine documentary evidence of the work that they performed
c) Test a sample of the transactions and balances that the internal auditors examined
d) Determine the organizational level to which the internal auditors report

19. The auditor is most likely to discover omitted audit procedures during
a) Preparation of the management letter
b) Follow-up procedures performed in compliance with Generally Accepted Auditing
Standards
c) The conference held with the client prior to issuing the audit report
 d) A post engagement review performed as part of the firm’s quality control inspection
program

20. When conditions and events have been identified which may cast significant doubt on
the entity’s ability to continue as a going concern, the auditor should consider
performing the following procedures except
a) Review management’s plans for future actions based on going concern assessment
b) Gather sufficient appropriate evidence to confirm or dispel whether or not a
material uncertainty exists by carrying out procedures such as considering the effect
of management plans and other mitigating factors
c) Seek written representations from management regarding its plans for future
actions
d) Issue a report that contains a disclaimer of opinion

Answer Key:
1. A
2. C
3. C
4. B
5. D
6. A
7. C
8. C
9. C
10. C
11. C
12. C
13. C
14. C
15. D
16. B
17. D
18. D
19. D
20. D