Completing the Audit

The responsibility for the identification and disclosure of related parties and transactions with such parties rests with the

• Auditor

• Entity’s management

• FRSC

• SEC

After determining that a related party transaction has, in fact, occurred, an auditor should

• Obtain an understanding of the business purpose of the transaction.

• Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction.

• Add a separate paragraph to the auditor’s report to explain the transaction.

• Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.

Which of the following audit procedures is most likely to assist an auditor in identifying related party transactions?

• Inspecting communications with law firms for evidence of unreported contingent liabilities.

• Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.

• Retesting ineffective controls previously reported to the audit committee.

• Sending second requests for unanswered positive confirmations of accounts receivable.

Which of the following would not necessarily be a related party transaction?

• A purchase from another corporation that is controlled by the corporation’s chief shareholder.

• A loan from the corporation of a major shareholder.

• Sale of land to the corporation by the spouse of a director.

• A sale of another corporation with a similar name.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?

• Cash flows from operating activities are negative

• Stock dividends replace annual cash dividends

• Significant related party transactions are pervasive

• Research and development projects are postponed

When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to

• Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern

• Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern

• Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.

• Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that specifically refers to “substantial doubt” and “going concern”.

The date of the written representation shall be

• After the date of the auditor’s report

• After the date of approval of the entity’s financial statements

• Before the entity’s financial statements are issued

• As near as practicable to, but not after the date of the auditor’s report on the financial statements

A written representation from a client’s management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

• Chief financial officer and the chair of the board of directors

• Chief executive officer and the chief financial officer

• Chief executive officer, the chair of the board of directors, and the client’s lawyer

• Chair of the audit committee of the board of directors

What type of opinion is most appropriate when management does not provide written representations about its responsibility for the preparation of the financial statements?

• Qualified opinion

• Disclaimer of opinion

• Adverse  opinion

• Unmodified opinion

Analytical procedures used in the overall review stage of the audit generally include

• Retesting controls that appeared to be ineffective during the assessment of control risk

• Considering unusual or unexpected account balances that were not previously identified

• Gathering evidence concerning account balances that have not changed from the prior year

• Performing tests of transactions to corroborate management’s financial statement assertions