Auditing And Assurance Services
17th Edition
ISBN: 9780134897431
Author: ARENS, Alvin A.
Publisher: PEARSON
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Chapter 16, Problem 20.1MCQ
To determine
Identify the option which should be choose by the auditor, when an auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year.
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As a result of analytical procedures, the auditor determines that the gross profitpercentage has declined from 30% in the preceding year to 20% in the current year.The auditor should(1) express a qualified opinion due to inability of the client company to continue asa going concern.(2) evaluate management’s performance in causing this decline.(3) require footnote disclosure.(4) consider the possibility of a misstatement in the financial statements.
As a result of analytical procedures an auditor determines that gross profit has declined from 30% to 15% in the current year. The auditor should..
A. Document manamgent intentions with respect to reversing the trend.
B. Evaluate managment's performance in causing the deline
C. Require a footnote disclosure
D. Consider the possibility of an error in the financial statements.
For Questions 21 through 30, assume that you are reporting on an audit of a client’s financial statements. Select the type(s) of opinion appropriate for the scenario. In addition, unless stated otherwise, assume the matter involved is material. If the problem does not tell you whether a misstatement pervasively misstates the financial statements or does not list a characteristic that indicates pervasiveness, two reports may be possible.
A company has not followed generally accepted accounting principles in the recording of its leases.
Question 21 options:
Qualified
Adverse
Disclaimer
Qualified or adverse
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
Question 22 options:
Unmodified – standard
Unmodified with…
Chapter 16 Solutions
Auditing And Assurance Services
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Prob. 3RQCh. 16 - Prob. 4RQCh. 16 - Explain why you agree or disagree with the...Ch. 16 - Prob. 6RQCh. 16 - Prob. 7RQCh. 16 - Prob. 8RQCh. 16 - Prob. 9RQCh. 16 - Prob. 10RQ
Ch. 16 - Prob. 11RQCh. 16 - Under what circumstances is it acceptable to...Ch. 16 - Prob. 13RQCh. 16 - Prob. 14RQCh. 16 - Prob. 15RQCh. 16 - Prob. 16RQCh. 16 - Prob. 17RQCh. 16 - Prob. 18RQCh. 16 - Prob. 19RQCh. 16 - Prob. 20.1MCQCh. 16 - Prob. 20.2MCQCh. 16 - Prob. 20.3MCQCh. 16 - The following questions deal with confirmation of...Ch. 16 - Prob. 21.2MCQCh. 16 - Prob. 21.3MCQCh. 16 - Prob. 22.1MCQCh. 16 - Prob. 22.2MCQCh. 16 - Prob. 22.3MCQCh. 16 - Prob. 23.1MCQCh. 16 - Which of the following is least likely to be a...Ch. 16 - The following questions concern auditor...Ch. 16 - Prob. 24DQPCh. 16 - Prob. 25DQPCh. 16 - Prob. 26DQPCh. 16 - The following misstatements are sometimes found in...Ch. 16 - Prob. 28DQPCh. 16 - Prob. 29DQPCh. 16 - Prob. 30DQPCh. 16 - Prob. 31DQPCh. 16 - Prob. 32DQPCh. 16 - Prob. 33DQPCh. 16 - Prob. 34DQPCh. 16 - Prob. 35DQPCh. 16 - Prob. 36DQPCh. 16 - Prob. 38DQPCh. 16 - Prob. 39ICA
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- Which of the following statements would most likely appear in an auditor's engagement letter? a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. b. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. c. A reminder that management is responsible for illegal acts committed by employees. d. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement. e. Required evidence is needed to issue a qualified opinion.arrow_forwardWhich of the following circumstances would most likely cause an auditor to suspectthat material misstatements exist in the financial statements?(1) The assumptions used in developing the prior year’s accounting estimates havechanged.(2) Differences between reconciliations of control accounts and subsidiary recordsare not investigated.(3) More confirmation requests were sent this year relative to last year.(4) Management consults with another CPA firm about complex accounting matters.arrow_forward20. To correct all errors they discover in the accounting records for the year under audit. The auditors should prepare adjusting journal entries for material items only. Because they are concerned with the fairness, not the preciseness, of the client's financial statements. Select one:TrueFalsearrow_forward
- Which of the following statements is incorrect? A. As the risk of material misstatement in the financial statements increases, the auditor relies more on substantive analytical procedures rather than tests of details of transactions and balances B. It is common, but not required, to use analytical procedures as substantive tests; C. Tests of transactions are often performed during the interim audit work D.Tests of details of balances are normally done during the year-end audit workarrow_forwardMost auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to Select one: a. assure investors that net income reported this year will be exceeded in the future b. review the statements using the accounting principles promulgated by the SEC c. examine the substance of transactions and balances for possible misinformationarrow_forwardYour view of what the companies’ auditors would need to consider in the effective audit of its primary revenues. For example, what would you do to audit the revenue streams? How would you verify that they are correctly stated in the financial statements without material error? Identify no more than three audit procedures around revenue recognition for the company you selected.arrow_forward
- An internal auditor plans to use an analytical review to verify the correctness of various operating expenses in a division. The use of an analytical review as a verification technique would not be a preferred approach if: Select one: a. The auditor notes strong indicators of a specific fraud involving this account b. The auditor would like to identify large, unusual, or nonrecurring transactions during the year. c. The operating expenses vary in relation to other operating expenses but not in relation to revenue. d. The company has relatively stable operations that have not changed much over the past yeararrow_forward8. An auditor should be aware of subsequent event that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may: a. Have been recorded based on preliminary accounting estimates. b. Require adjustments to the financial statements as of the year end. c. Have been recorded based on year-end tests for asset obsolescence. d. Require disclosure to keep the financial statement from being misleading. 9. Analytical procedures used in planning an audit should focus on: a. Identifying material weaknesses in internal control. b. Enhancing the auditor’s understanding of the client’s business. c. Testing individual account balances that depend on accounting estimates. d. Evaluating the adequacy of evidence gathered concerning unusual balances.arrow_forwardWith respect to fraudulent financial reporting, which one of the following statements is not correct? a.The risk that the auditor will not detect misstatement due to management fraud is greater than those due to employee fraud. b.It is difficult for the auditor to determine if misstatements in accounting estimates are caused by fraud or error. c.When the audit is properly planned and performed in accordance with ISAs, material misstatements are guaranteed to be detected by the auditor. d.Excessive pressure on management to meet expectations of third parties creates incentives forarrow_forward
- The following are typical questions that might appear on an internal control questionnaire for accounts payable. 1. Are monthly statements from vendors reconciled with the accounts payable listing? 2. Are vendors’ invoices matched with receiving reports before they are approved for payment? Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of the risk of material misstatement.arrow_forwardMaterial loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. For a public company these considerations will affect the audit report as follows: ) If a loss meets these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. ) If a loss meets these criteria and is disclosed in the financial statement notes, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. If a loss is probable but the amount cannot be reasonably…arrow_forwardAfter the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?a. Perform the omitted procedure or an alternative procedure.b. Notify the board of directors and regulatory agencies that are currently relying on auditor’s reports.c. Determine whether the omitted procedure is important in supporting the auditor’s opinion on the entity’s financial statements.d. Engage another public accounting firm to conduct a quality assurance review.arrow_forward
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