Auditing & Accounting Chapter 17 TB

8/13/2019 Auditing & Accounting Chapter 17 TB

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Chapter 17 - Completing the Audit Engagement

Chapter 17

Completing the Audit Engagement

True / False Questions

1. Every contingent liability must be recorded.

True False

2. An example o a contingent liability is an income tax dispute.

True False

!. "eading contracts and loan agreements is one #ay to identiy unrecorded contingentliabilities.True False

$. A legal letter #ill include and evaluate all contingent liabilities o the company.

True False

%. Type && subse'uent events are conditions that re'uire an ad(ustment to the account balancesho#n on the inancial statements.

True False

). An example o a Type & event or condition is the settlement o a la#suit ater the balance

sheet date or an amount dierent rom the amount recorded in the year-end inancial

statements.True False

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7. An example o a Type && event or condition is an uncollectible account receivable resulting

rom continued deterioration o a customer*s inancial condition leading to ban+ruptcy aterthe balance sheet date.

True False

,. ual dating is used to identiy unrecorded contingent liabilities.

True False

. The auditor must perorm inal analytical procedures beore deciding on the appropriate

audit report to issue or the entity.True False

1/. & there is substantial doubt about the entity*s ability to continue as a going concern0 the

auditor should obtain inormation about management*s plans to mitigate the problem andassess the li+elihood that such plans can be implemented.

True False

Multiple Choice Questions

11. hen auditing contingent liabilities0 #hich o the ollo#ing procedures #ould be leasteective

A. "eading the minutes o the board o directors

3. "evie#ing the ban+ conirmation letterC. Examining customer conirmation replies

. Examining invoices or proessional services

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12. hen obtaining evidence regarding litigation against a client0 the C4A #ould be least

interested in determiningA. An estimate o #hen the matter #ill be resolved

3. The period in #hich the underlying cause o the litigation occurred

C. The probability o an unavorable outcome. An estimate o the potential loss

1!. The auditor*s primary means o obtaining corroboration o management*s inormation

concerning litigation is a

A. 5etter o audit in'uiry to the client*s la#yer3. 5etter o corroboration rom the auditor*s la#yer upon revie# o the legal documentation

C. Conirmation o claims and assessments rom the other parties to the litigation

. Conirmation o claims and assessments rom an oicer o the court presiding over the

litigation

1$. An auditor should obtain evidential matter relevant to all the ollo#ing actors concerning

third-party litigation against a client except theA. 4eriod in #hich the underlying cause or legal action occurred

3. 4robability o an unavorable outcome

C. 6urisdiction in #hich the matter #ill be resolved. Existence o a situation indicating an uncertainty as to the possible loss

1%. An auditor #ill ordinarily examine invoices rom la#yers primarily in order to

A. ubstantiate accruals3. Assess the legal ramiications o litigation in progress

C. Estimate the dollar amount o contingent liabilities

. &dentiy possible unasserted litigation0 claims0 and assessments

1). & a la#yer reuses to urnish corroborating inormation regarding litigation0 claims0 and

assessments0 the auditor shouldA. 8onor the conidentiality o the client-la#yer relationship3. Consider the reusal to be a scope limitation

C. ee+ to obtain the corroborating inormation rom management

. isclose this act in a ootnote to the inancial statements

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17. The reusal o a client*s attorney to provide a representation on the legality o a particular

act committed by the client is generallyA. uicient reason to issue a 9sub(ect to9 'ualiied opinion

3. Considered to be a scope limitation

C. &nsuicient reason to modiy the auditor*s report because o the attorney*s obligation oconidentiality. 4roper grounds to #ithdra# rom the engagement #ithout urther consideration

1,. hich o the ollo#ing material events occurring subse'uent to the balance sheet date

#ould re'uire an ad(ustment to the inancial statements beore they could be issuedA. ale o long-term debt or capital stoc+

3. 5oss o a plant as a result o a lood

C. :a(or purchase o a business that is expected to double sales volume

. ettlement o litigation0 in excess o the previously recorded liability

1. hich o the ollo#ing situations #ould re'uire ad(ustment to or disclosure in the

inancial statementsA. A merger discussion

3. The application or a patent on a ne# production process

C. iscussions #ith a customer that could lead to a $/ percent increase in the client*s sales iagreement is successul

. The ban+ruptcy o a customer #ho regularly purchased !/ percent o the company*s output

2/. An example o a Type 1 subse'uent event isA. A tornado that destroys a client*s actory ater the balance sheet date

3. An event ater the balance sheet date that conirms the auditor*s belie ;documented prior to

the end o the client*s iscal year< that a large portion o the client*s inventory is obsoleteC. =otiication o an &" audit ater the balance sheet date

. The client*s 3oard o irectors unexpectedly resigns ater the balance sheet date

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21. An auditor issued an audit report that #as dual dated or a subse'uent event that occurred

ater the completion o ield #or+ but beore issuance o the auditor*s report. The auditor*sresponsibility or events occurring subse'uent to the completion o ield #or+ #as

A. 5imited to the speciic event reerenced

3. 5imited to include only events occurring beore the date o the last subse'uent eventreerencedC. Extended to subse'uent events occurring through the date o issuance o the report

. Extended to include all events occurring since the completion o ield #or+

22. hich o the ollo#ing procedures should an auditor generally perorm regardingsubse'uent events

A. Compare the latest available interim inancial statements issued ater year-end #ith the

inancial statements being audited

3. end second re'uests to the client*s customers #ho ailed to respond to initial accountsreceivable conirmation re'uests

C. Communicate material #ea+nesses in internal controls to those charged #ith governance

. "evie# the cuto ban+ statements or several months ater year-end

2!. The purpose o analytical procedures at the completion o the audit includes all o the

ollo#ing exceptA. "evising the audit plan

3. Considering overall reasonableness o the inancial statements

C. "evie#ing ade'uacy o evidence gathered to investigate unusual luctuations. "ecalculating some o the ratios examined during audit planning

2$. hich o the ollo#ing auditing procedures is ordinarily perormed last

A. Conirming accounts payable3. Testing the purchasing unction

C. "eading the minutes o directors* meetings

. >btaining a management representation letter

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2%. The date o the management representation letter should coincide #ith the

A. ate o the latest subse'uent event reerred to in the notes to the inancial statements3. 3alance sheet date

C. ate o the auditor*s report

. ate o the engagement agreement

2). hich o the ollo#ing items should an auditor communicate to those charged #ithgovernance in a publicly-held entity

A. igniicant audit ad(ustments recorded by the entity and management*s consultation #ith

other accountants about signiicant accounting matters3. igniicant audit ad(ustments recorded by the entity but not management*s consultation

#ith other accountants about signiicant accounting matters

C. :anagement*s consultation #ith other accountants about signiicant accounting matters but

not signiicant audit ad(ustments recorded by the entity. =either signiicant audit ad(ustments recorded by the entity nor management*s consultation

#ith other accountants about signiicant accounting matters

27. The management letter is used

A. To allo# management to corroborate oral representations to the auditor

3. To conirm the terms o the audit engagementC. To list all reportable conditions #ith respect to internal controls

. To ma+e recommendations to the client based on observations made during the audit

2,. A(ax0 &nc. is an ailiate o the audit client and is audited by another audit irm. hich othe ollo#ing is most li+ely to be used by the auditor to obtain assurance that all guarantees by

the client o the ailiate*s indebtedness have been detected

A. end the standard ban+ conirmation re'uest to all the client*s lender ban+s3. "evie# client minutes and obtain a representation letter

C. Examine supporting documents or all entries in intercompany accounts

. >btain #ritten conirmation o indebtedness rom the auditor o the ailiate

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2. ?enerally0 loss contingencies that are (udged to be remote@

A. hould be disclosed in the ootnotes3. hould be recorded in the inancial statements

C. hould not be disclosed in the ootnotes

. hould be recorded in the inancial statements and the ootnotes

!/. hich o the ollo#ing procedures #ould an auditor most li+ely perorm to obtainevidence about an entity*s subse'uent events

A. "econcile ban+ activity or the month ater the balance sheet date #ith cash activity

relected in the accounting records3. >btain a letter rom the entity*s attorney describing any pending litigation0 unasserted

claims0 or loss contingencies

C. "evie# the treasurer*s monthly reports on temporary investments o#ned0 purchased0 and

sold. Examine on a test basis the purchase invoices and receiving reports or several days ater

the inventory date

!1. hich o the ollo#ing procedures #ould an auditor ordinarily perorm during the revie#

o subse'uent events

A. An analysis o related party transactions or the discovery o possible irregularities3. A revie# o the cut-o ban+ statements or the period ater the year-end

C. An in'uiry o the client*s legal counsel concerning litigation

. An investigation o material #ea+nesses in internal control previously communicated tothe client

!2. hich o the ollo#ing is notan audit procedure that the independent auditor #ould

perorm #ith respect to litigation0 claims and assessmentsA. &n'uire o and discuss #ith management the policies and procedures adopted or

identiying0 evaluating0 and accounting or litigation0 claims0 and assessments

3. >btain rom management a description and evaluation o litigation0 claims0 and

assessments that existed at the balance sheet date

C. >btain assurance rom management that it has disclosed all unasserted claims that thela#yer has advised are li+ely to be asserted and must be disclosed

. Conirm directly #ith the client*s la#yer that all claims have been recorded in the inancialstatements

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!!. An attorney is responding to an independent auditor as a result o the audit client*s letter o

in'uiry. The attorney may appropriately limit the response toA. Asserted claims and litigation

3. :atters to #hich the attorney has given substantive attention in the orm o legal

consultation or representationC. Asserted0 overtly threatened0 or pending claims and litigation. &tems #hich have an extremely high probability o being resolved to the client*s detriment

!$. hich o the ollo#ing is generally re'uested in a legal letter

A. A re'uest that the attorney comment on unasserted claims #here his or her vie#s dierrom management*s evaluation

3. A list o all attorneys that perormed any #or+ or the entity during the year

C. A statement indicating that the attorney is responsible or the air presentation o

unasserted claims in the entity*s inancial statements. A re'uest that the attorney provide a copy o all invoices given to the client during the year

!%. hich o the ollo#ing subse'uent events #ill be least li+ely to result in an ad(ustment tothe inancial statements

A. Culmination o events aecting the realiation o accounts receivable o#ned as o the

balance sheet date3. Culmination o events aecting the realiation o inventories o#ned as o the balance sheet

date

C. :aterial changes in the settlement o liabilities #hich #ere estimated as o the balancesheet date

. :aterial changes in the 'uoted mar+et prices o listed investment securities since the

balance sheet date

!). ubse'uent events or #hich the auditor has a responsibility to actively search are deined

as events #hich occur subse'uent to the

A. 3alance sheet date

3. ate o the auditor*s report

C. 3alance sheet date but prior to the date o the auditor*s report. ate o the auditor*s report and concern contingencies #hich are not relected in the

inancial statements

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!7. An auditor is concerned #ith completing various phases o the examination ater the

balance sheet date. This 9subse'uent period9 involving ormal auditor procedures extends tothe date o the

A. Auditor*s report

3. Final revie# o the audit #or+ing papersC. 4ublic issuance o the inancial statements. elivery o the auditor*s report to the client

!,. A ma(or customer o an audit client suers a ire ater year end0 but (ust prior to

completion o audit ield #or+. The audit client believes that this event could have asigniicant direct eect on the inancial statements. The auditor should

A. Advise management to disclose the event in notes to the inancial statements

3. isclose the event in the auditor*s report

C. ithhold submission o the auditor*s report until the extent o the direct eect on theinancial statements is +no#n

. Advise management to ad(ust the inancial statements

!. & an auditor dates the auditor*s report on inancial statements or the year ended

ecember !10 2//0 as o February 1/0 2/1/0 except or =ote 60 as to #hich the date is :arch

!0 2/1/0 the auditor is ac+no#ledging responsibility to actively search or and ensure properhandling by management o

A. All subse'uent events occurring through :arch !0 2/1/

3. All subse'uent events occurring through February 1/0 2/1/C. All subse'uent events occurring through February 1/0 2/1/ and the speciic subse'uent

event reerred to in =ote 6 through :arch !0 2/1/

. >nly the speciic subse'uent event reerred to in =ote 6 as o :arch !0 2/1/

$/. 8arvey0 C4A is preparing an audit program or the purpose o ascertaining the occurrence

o subse'uent events that may re'uire ad(ustment or disclosure essential to a air presentation

o the inancial statements in conormity #ith generally accepted accounting principles.

hich one o the ollo#ing procedures #ould be least appropriate or this purpose

A. Conirm0 as o the completion o ield #or+0 accounts receivable that have increasedsigniicantly rom the year-end date

3. "ead the minutes o the board o directorsC. &n'uire o management concerning events that may have occurred

. >btain a la#yer*s letter as o the completion o ield #or+

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$1. A Type && subse'uent event usually re'uires@

A. An ad(ustment to the inancial statements and the ootnotes3. An ad(ustment to the inancial statements but no special disclosure is re'uired

C. isclosure in the ootnotes

. =either an ad(ustment to the inancial statements nor disclosure in the ootnotes

$2. Ater ield #or+ audit procedures are completed0 a partner o the C4A irm #ho has notbeen involved in the audit perorms a second or #rap-up revie# o the #or+ing papers. This

second revie# usually ocuses on

A. The audit report0 inancial statements0 and ootnotes or consistency3. &rregularities involving the client*s management and its employees

C. The materiality o the ad(usting entries proposed by the audit sta

. The communication o internal control #ea+nesses to those charged #ith governance

$!. &n the course o the examination o inancial statements or the purpose o expressing an

opinion0 the auditor normally prepares a schedule o unad(usted dierences or #hich the

auditor did not propose ad(ustments #hen they #ere discovered. hat is the primary purposeo this schedule

A. To point out to the responsible client oicials the errors made by various company

personnel3. To summarie the ad(ustments that must be made beore the company can prepare and

submit its ederal tax return

C. To identiy the potential inancial statement eects o errors or disputed items that #ereconsidered immaterial #hen discovered

. To summarie the errors made by the company so that corrections can be made ater the

audited inancial statements are released

$$. hich o the ollo#ing ratios is least li+ely to assist the auditor in determining #hether

the client is experiencing inancial diiculties

A. =et #orthBtotal liabilities

3. CashBtotal assets

C. Total liabilitiesBtotal assets. =et income beore taxesBnet sales

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$%. As part o an audit0 a C4A oten re'uests a representation letter rom the client. hich

one o the ollo#ing is not a valid purpose o such a letterA. To provide audit evidence

3. To emphasie to the client their responsibility or the airness o the inancial statements

C. To satisy himsel or hersel that a certain account balance is airly stated #hen certaincustomary auditing procedures are not perormed. To provide possible protection to the C4A against a charge o +no#ledge in cases #here

raud is subse'uently discovered to have existed in the accounts

$). hich o the ollo#ing expressions is least li+ely to be included in a client*srepresentation letter

A. =o events have occurred subse'uent to the balance sheet date that re'uire ad(ustment to or

disclosure in0 the inancial statements

3. The company has complied #ith all aspects o contractual agreements that #ould have amaterial eect on the inancial statements in the event o noncompliance

C. :anagement ac+no#ledges responsibility or illegal actions committed by its employees

. :anagement has made available all inancial statements and related data

$7. 9There are no violations or possible violations o la#s or regulations #hose eects should

be considered or disclosure in the inancial statements or as a basis or recording a losscontingency.9 The oregoing passage most li+ely is rom a;anbtain an opinion rom the company*s attorney as to the li+elihood o the trustee*s

enorcement o the re'uirement

%7. Auditors oten re'uest that the audit client send a letter o in'uiry to those attorneys #ho

have been consulted #ith respect to litigation0 claims0 or assessments. The primary reason or

this re'uest is to provide the auditor #ith

A. An estimate o the dollar amount o the probable loss3. An expert opinion as to #hether a loss is possible0 probable0 or remote

C. &normation concerning the progress o cases to date

. Corroborative in'uiries made o the client by the auditor

%,. The primary reason an auditor re'uests letters o in'uiry be sent to a client*s attorneys is to

provide the auditor #ithA. A description and evaluation o litigation0 claims0 and assessments that existed at the date

o the balance sheet

3. An expert opinion as to #hether a loss is possible0 probable0 or remoteC. The opportunity to examine the documentation concerning litigation0 claims0 and

assessments

. Corroboration o the inormation urnished by management concerning litigation0 claims0and assessments

%. hich o the ollo#ing statements extracted rom a client*s la#yer*s letter concerning

litigation0 claims0 and assessments most li+ely #ould cause the auditor to re'uest

clariication

A. 9& believe that the possible liability to the company is nominal in amount.93. 9& believe that the action can be settled or less than the damages claimed.9

C. 9& believe that the plainti*s case against the company is #ithout merit.9. 9& believe that the company #ill be able to deend this action successully.9

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)/. An auditor*s decision concerning #hether or not to 9dual date9 the audit report is based

upon the auditor*s #illingness toA. Extend auditing procedures

3. Accept responsibility or all events bet#een year-end and the audit report date

C. 4ermit inclusion o a ootnote captioned@ event ;unaudited< subse'uent to the date o theauditor*s report. Assume responsibility or events subse'uent to the issuance o the auditor*s report

)1. A Type & subse'uent event usually re'uires@

A. An ad(ustment to the inancial statements3. =o ad(ustment to the inancial statements

C. ithdra#al rom the engagement

. =one o the above

)2. A disclosure o a contingent liability in the ootnotes is made rather than ad(usting the

inancial statement accounts #hen@

A. The outcome o the event is (udged to be reasonably possible and the loss can bereasonably estimated.

3. The loss can be reasonably estimated0 but the outcome is un+no#n.

C. The outcome o the event is (udged to be reasonably possible but the loss cannot bereasonably estimated.

. The outcome is un+no#n and the loss is reasonably estimable but the client does not #ant

to boo+ the loss.

)!. hich o the ollo#ing statements ordinarily is included among the #ritten client

representations obtained by the auditor

A. Compensating balances and other arrangements involving restrictions on cash balanceshave been disclosed

3. :anagement ac+no#ledges responsibility or illegal actions committed by employees

C. uicient evidential matter has been made available to permit the issuance o an

un'ualiied opinion

. :anagement ac+no#ledges that there are no material #ea+nesses in the account balances

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)$. hich o the ollo#ing statements is correct about an auditor*s re'uired communication

#ith management and those charged #ith governanceA. Any matters communicated to those charged #ith governance are also re'uired to be

communicated to the entity*s management

3. The auditor is re'uired to inorm those charged #ith governance about signiicant errorsdiscovered by the auditor and subse'uently corrected by managementC. The auditor does not have any re'uirement to communicate #ith anyone outside o

management

. ea+nesses in internal control previously reported to those charged #ith governance arere'uired to be communicated to those charged #ith governance ater each subse'uent audit

until the #ea+nesses are corrected

)%. hich o the ollo#ing statements is correct concerning an auditor*s re'uired

communication #ith those charged #ith governanceA. This communication is re'uired to occur beore the auditor*s report on the inancial

statements is issued

3. This communication should include management changes in the application o signiicantaccounting policies

C. Any signiicant matter communicated to those charged #ith governance also should be

communicated to management. igniicant audit ad(ustments proposed by the auditor and recorded by management need

not be communicated to those charged #ith governance

)). For #hich o the ollo#ing matters should an auditor obtain #ritten management

representations

A. :anagement*s cost-beneit (ustiications or not correcting internal control #ea+nesses3. :anagement*s +no#ledge o uture plans that may aect the price o the entity*s stoc+

C. :anagement*s compliance #ith contractual agreements that may aect the inancial

statements

. :anagement*s ac+no#ledgment o its responsibility or employees* violations o la#s

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)7. ey Co. plans to present comparative inancial statements or the years ended ecember

!10 2//, and 2//0 respectively. mith0 C4A0 audited ey*s inancial statements or bothyears and plans to report on the comparative inancial statements on :ay 10 2/1/. ey*s

current management team #as not present until 6anuary 10 2//. hat period o time should

be covered by ey*s management representation letterA. 6anuary 10 2//, through ecember !10 2//3. 6anuary 10 2//, through :ay 10 2/1/

C. 6anuary 10 2// through ecember !10 2//

. 6anuary 10 2// through :ay 10 2/1/

),. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther

in'uiries #ith respect to audited inancial statements covered by an auditor*s report unless

A. A la#suit in #hich ris+ o loss #as considered remote is resolved in the company*s avor

3. A development occurs #hich may aect the client*s ability to continue as a going concernC. A material raud is initiated by an employee ater the report is issued

. Evidence o signiicant0 non-arms-length0 related party transactions that happened prior to

year-end is discovered

). Ater an auditor has issued an audit report on a nonpublic entity0 there is no obligation to

ma+e any urther audit tests or in'uiries #ith respect to the audited inancial statementscovered by that report unless

A. =e# inormation comes to the auditor*s attention concerning an event that occurred prior

to the date o the auditor*s report that may have aected the auditor*s report3. :aterial adverse events occur ater the date o the auditor*s report

C. Final determination or resolution #as made on matters that had resulted in a 'ualiication

in the auditor*s report. Final determination or resolution #as made o a contingency that had been disclosed in the

inancial statements and no liability arose rom the resolution

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7/. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther

in'uiries #ith respect to audited inancial statements covered by that report unlessA. A inal resolution o a contingency that had resulted in a 'ualiication o the auditor*s

report is made

3. A development occurs that may aect the client*s ability to continue as a going concernC. An investigation o the auditor*s practice by a peer revie# committee ensues. =e# inormation is discovered concerning undisclosed related party transactions o the

previously audited period

71. ho generally signs the legal letterA. The board o directors

3. The audit partner

C. The CE> o the entity being audited

. The entity*s attorneys

Short Answer Questions

72. A discrimination la#suit is pending or your client0 4retty 4eople &ncorporated. hat

inormation about the la#suit #ould you as an auditor need to +no# to decide #hether todisclose the litigation in the inancial statements

7!. eine the term 9contingent liability9 and discuss the criteria used to classiy these events

or conditions. 4rovide some example o contingent liabilities.

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7$. From the list belo#0 select the procedures that an auditor #ould use to test or contingent

liabilities.a. &n'uire o EC oicials regarding reported violations by the client #hich create claims

b. "ead the client*s contracts0 loan agreements0 leases0 and other documents

c. "ead the client*s minutes o meetings o shareholders0 directors0 and committeesd. "e'uest a representation letter rom all the client*s employeese. "ead the legal bries o all suits iled against the client*s competitors

. "e'uest the client*s management to prepare a letter o in'uiry to the client*s attorney

regarding pending litigation against the client

7%. hile auditing other business processes0 an auditor may identiy inormation aboutcontingent liabilities. hat speciic audit procedures relating to other business processes

could uncover these liabilities

7). hat inormation is typically re'uested in a legal letter to a client*s attorney

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77. hat is an unasserted claim and #hy #ould an attorney andBor client be reluctant to

disclose an unasserted claim in the inancial statements

7,. hat is the dierence bet#een contingent liabilities and commitments

7. &dentiy the t#o primary types o subse'uent events that re'uire consideration bymanagement and evaluation by the auditor and give t#o examples o each type.

,/. iscuss the steps used by an auditor to evaluate an entity*s ability to continue as a going

concern.

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,1. iscuss the internal control communication re'uirements o the 4CA>3. hat must

auditors o public companies report to those charged #ith governance

,2. tate the t#o primary purposes o the client letter o representation.

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,!. The ield #or+ or the ecember !10 2// audit o 4ump+in Corporation ended on :arch

1!0 2/1/. The inancial statements and auditor*s report #ere issued and mailed to stoc+holderson :arch 2!0 2/1/. &n each o the situations belo#0 select rom the list at the end o the

problem the appropriate action to be ta+en by the auditor. Assume all situations are material.

Situations:1< >n April %0 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the entireuninsured inventory in one o 4ump+in*s #arehouses.

2< >n February 170 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the

entire uninsured inventory in one o 4ump+in*s #arehouses.!< >n February 170 2/1/0 you discovered that on =ovember !/0 2//0 a lood destroyed the

entire uninsured inventory in one o 4ump+in*s #arehouses.

$< >n April %0 2/1/0 you discovered that on :arch !/0 2/1/0 a ire destroyed one o4ump+in*s 1/ plants.

%< >n April 70 2/1/0 you discovered that a debtor o 4ump+in #ent ban+rupt on 6anuary )0

2/1/.

)< >n 6anuary 1)0 2/1/0 a la#suit #as iled against 4ump+in or a patent inringement actionthat allegedly too+ place in early 1. &n the opinion o 4ump+in*s attorneys0 there is a

reasonable ;but not probable< danger o a signiicant loss to 4ump+in.

7< >n February 10 2/1/0 4ump+in settled a la#suit out o court that had originated in 1,and is currently listed as a contingent liability.

Possile Actions:

a. Ad(ust the ecember !10 2// inancial statements.b. isclose the inormation in a ootnote in the ecember !10 2// inancial statements

c. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The

revision should involve an ad(ustment to the ecember !10 2// inancial statements.d. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The

revision should involve the addition o a ootnote0 but no ad(ustment0 to the ecember !102// inancial statements.

e. =o action is re'uired.

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Chapter 17 Completing the Audit Engagement Ans#er ey

True / False Questions

1. Every contingent liability must be recorded.

FA!SE

AACSB: Communications

AICPA BB: Critical Thinking

AICPA FN: Decision MakingBloom's: Knowlege

Di!!icult": #as"$earning %&ecti(e: )

2. An example o a contingent liability is an income tax dispute.

T"#E

AACSB: CommunicationsAICPA BB: Critical Thinking

AICPA FN: Decision Making

Bloom's: Knowlege

Di!!icult": #as"

$earning %&ecti(e: )

!. "eading contracts and loan agreements is one #ay to identiy unrecorded contingentliabilities.

T"#E


AICPA BB: Critical ThinkingAICPA FN: Decision Making

Bloom's: A**lication

Di!!icult": #as"$earning %&ecti(e: +

17-2!


24/61


$. A legal letter #ill include and evaluate all contingent liabilities o the company.

FA!SE




Bloom's: Knowlege

Di!!icult": #as"$earning %&ecti(e: ,

%. Type && subse'uent events are conditions that re'uire an ad(ustment to the account balancesho#n on the inancial statements.

FA!SE



Bloom's: Knowlege

Di!!icult": #as"

$earning %&ecti(e: -

). An example o a Type & event or condition is the settlement o a la#suit ater the balance

sheet date or an amount dierent rom the amount recorded in the year-end inancialstatements.

T"#E



Bloom's: Knowlege

Di!!icult": #as"


17-2$


25/61


7. An example o a Type && event or condition is an uncollectible account receivable resulting

rom continued deterioration o a customer*s inancial condition leading to ban+ruptcy aterthe balance sheet date.

FA!SE



Bloom's: Knowlege

Di!!icult": #as"


,. ual dating is used to identiy unrecorded contingent liabilities.

FA!SE




Bloom's: Knowlege

Di!!icult": #as"$earning %&ecti(e: .

. The auditor must perorm inal analytical procedures beore deciding on the appropriateaudit report to issue or the entity.

T"#E




Di!!icult": #as"

$earning %&ecti(e: /

17-2%


26/61


1/. & there is substantial doubt about the entity*s ability to continue as a going concern0 the

auditor should obtain inormation about management*s plans to mitigate the problem andassess the li+elihood that such plans can be implemented.

T"#E




Di!!icult": #as"

$earning %&ecti(e: 0

Multiple Choice Questions

11. hen auditing contingent liabilities0 #hich o the ollo#ing procedures #ould be leasteective

A."eading the minutes o the board o directors3."evie#ing the ban+ conirmation letter

C$Examining customer conirmation replies

.Examining invoices or proessional services




Bloom's: A**licationDi!!icult": #as"

$earning %&ecti(e: +

12. hen obtaining evidence regarding litigation against a client0 the C4A #ould be leastinterested in determining

A$An estimate o #hen the matter #ill be resolved

3.The period in #hich the underlying cause o the litigation occurredC.The probability o an unavorable outcome

.An estimate o the potential loss


AICPA FN: Measurement

Bloom's: Anal"sis

Di!!icult": Moerate

$earning %&ecti(e: +$earning %&ecti(e: ,

17-2)


27/61


1!. The auditor*s primary means o obtaining corroboration o management*s inormation

concerning litigation is a

A$5etter o audit in'uiry to the client*s la#yer

3.5etter o corroboration rom the auditor*s la#yer upon revie# o the legal documentation

C.Conirmation o claims and assessments rom the other parties to the litigation.Conirmation o claims and assessments rom an oicer o the court presiding over thelitigation



AICPA FN: MeasurementBloom's: A**lication

Di!!icult": Moerate


$earning %&ecti(e: ,

1$. An auditor should obtain evidential matter relevant to all the ollo#ing actors concerning

third-party litigation against a client except theA.4eriod in #hich the underlying cause or legal action occurred

3.4robability o an unavorable outcome

C$6urisdiction in #hich the matter #ill be resolved.Existence o a situation indicating an uncertainty as to the possible loss




Di!!icult": #as"



1%. An auditor #ill ordinarily examine invoices rom la#yers primarily in order to

A.ubstantiate accruals

3.Assess the legal ramiications o litigation in progressC.Estimate the dollar amount o contingent liabilities

%$&dentiy possible unasserted litigation0 claims0 and assessments



Bloom's: Com*rehension

Di!!icult": #as"

$earning %&ecti(e: +$earning %&ecti(e: ,

17-27


28/61


1). & a la#yer reuses to urnish corroborating inormation regarding litigation0 claims0 and

assessments0 the auditor shouldA.8onor the conidentiality o the client-la#yer relationship

&$Consider the reusal to be a scope limitation

C.ee+ to obtain the corroborating inormation rom management.isclose this act in a ootnote to the inancial statements




Bloom's: A**licationDi!!icult": Moerate


17. The reusal o a client*s attorney to provide a representation on the legality o a particular

act committed by the client is generallyA.uicient reason to issue a 9sub(ect to9 'ualiied opinion

&$Considered to be a scope limitationC.&nsuicient reason to modiy the auditor*s report because o the attorney*s obligation o

conidentiality

.4roper grounds to #ithdra# rom the engagement #ithout urther consideration



AICPA FN: 1e*orting

Bloom's: A**licationDi!!icult": #as"


1,. hich o the ollo#ing material events occurring subse'uent to the balance sheet date#ould re'uire an ad(ustment to the inancial statements beore they could be issued

A.ale o long-term debt or capital stoc+

3.5oss o a plant as a result o a loodC.:a(or purchase o a business that is expected to double sales volume

%$ettlement o litigation0 in excess o the previously recorded liability


AICPA FN: 1e*orting


Di!!icult": #as"


17-2,


29/61


1. hich o the ollo#ing situations #ould re'uire ad(ustment to or disclosure in the

inancial statementsA.A merger discussion

3.The application or a patent on a ne# production process

C.iscussions #ith a customer that could lead to a $/ percent increase in the client*s sales iagreement is successul

%$The ban+ruptcy o a customer #ho regularly purchased !/ percent o the company*s output



AICPA FN: 1e*ortingBloom's: A**lication

Di!!icult": #as"


2/. An example o a Type 1 subse'uent event isA.A tornado that destroys a client*s actory ater the balance sheet date

&$An event ater the balance sheet date that conirms the auditor*s belie ;documented prior tothe end o the client*s iscal year< that a large portion o the client*s inventory is obsolete

C.=otiication o an &" audit ater the balance sheet date

.The client*s 3oard o irectors unexpectedly resigns ater the balance sheet date



AICPA FN: 1e*orting

Bloom's: Com*rehensionDi!!icult": #as"


17-2


30/61


21. An auditor issued an audit report that #as dual dated or a subse'uent event that occurred

ater the completion o ield #or+ but beore issuance o the auditor*s report. The auditor*sresponsibility or events occurring subse'uent to the completion o ield #or+ #as

A$5imited to the speciic event reerenced

3.5imited to include only events occurring beore the date o the last subse'uent eventreerencedC.Extended to subse'uent events occurring through the date o issuance o the report

.Extended to include all events occurring since the completion o ield #or+


AICPA FN: 1e*orting


Di!!icult": #as"

$earning %&ecti(e: .

22. hich o the ollo#ing procedures should an auditor generally perorm regarding

subse'uent events

A$Compare the latest available interim inancial statements issued ater year-end #ith the

inancial statements being audited

3.end second re'uests to the client*s customers #ho ailed to respond to initial accountsreceivable conirmation re'uests

C.Communicate material #ea+nesses in internal controls to those charged #ith governance

."evie# the cuto ban+ statements or several months ater year-end

AACSB: Anal"tic




Di!!icult": Moerate$earning %&ecti(e: 2

17-!/


31/61


2!. The purpose o analytical procedures at the completion o the audit includes all o the

ollo#ing except

A$"evising the audit plan

3.Considering overall reasonableness o the inancial statements

C."evie#ing ade'uacy o evidence gathered to investigate unusual luctuations."ecalculating some o the ratios examined during audit planning

AACSB: Anal"tic



Bloom's: Anal"sisDi!!icult": #as"


2$. hich o the ollo#ing auditing procedures is ordinarily perormed last

A.Conirming accounts payable3.Testing the purchasing unction

C."eading the minutes o directors* meetings

%$>btaining a management representation letter




Di!!icult": #as"

$earning %&ecti(e: )3


2%. The date o the management representation letter should coincide #ith the

A.ate o the latest subse'uent event reerred to in the notes to the inancial statements3.3alance sheet date

C$ate o the auditor*s report

.ate o the engagement agreement


AICPA BB: $egal


Di!!icult": #as"$earning %&ecti(e: /

17-!1


32/61


2). hich o the ollo#ing items should an auditor communicate to those charged #ith

governance in a publicly-held entity

A$igniicant audit ad(ustments recorded by the entity and management*s consultation #ith

other accountants about signiicant accounting matters

3.igniicant audit ad(ustments recorded by the entity but not management*s consultation#ith other accountants about signiicant accounting mattersC.:anagement*s consultation #ith other accountants about signiicant accounting matters but

not signiicant audit ad(ustments recorded by the entity

.=either signiicant audit ad(ustments recorded by the entity nor management*s consultation#ith other accountants about signiicant accounting matters


AICPA BB: Inustr"

AICPA FN: 1e*ortingBloom's: Knowlege

Di!!icult": Moerate$earning %&ecti(e: )3

27. The management letter is used

A.To allo# management to corroborate oral representations to the auditor

3.To conirm the terms o the audit engagementC.To list all reportable conditions #ith respect to internal controls

%$To ma+e recommendations to the client based on observations made during the audit


AICPA FN: 1e*orting

Bloom's: Knowlege

Di!!icult": #as"


17-!2


33/61


2,. A(ax0 &nc. is an ailiate o the audit client and is audited by another audit irm. hich o

the ollo#ing is most li+ely to be used by the auditor to obtain assurance that all guarantees bythe client o the ailiate*s indebtedness have been detected

A.end the standard ban+ conirmation re'uest to all the client*s lender ban+s

&$"evie# client minutes and obtain a representation letterC.Examine supporting documents or all entries in intercompany accounts.>btain #ritten conirmation o indebtedness rom the auditor o the ailiate


AICPA BB: Inustr"


Di!!icult": Moerate


2. ?enerally0 loss contingencies that are (udged to be [email protected] be disclosed in the ootnotes

3.hould be recorded in the inancial statements

C$hould not be disclosed in the ootnotes

.hould be recorded in the inancial statements and the ootnotes




Di!!icult": #as"

$earning %&ecti(e: )

17-!!


34/61


!/. hich o the ollo#ing procedures #ould an auditor most li+ely perorm to obtain

evidence about an entity*s subse'uent eventsA."econcile ban+ activity or the month ater the balance sheet date #ith cash activity

relected in the accounting records

&$>btain a letter rom the entity*s attorney describing any pending litigation0 unassertedclaims0 or loss contingenciesC."evie# the treasurer*s monthly reports on temporary investments o#ned0 purchased0 and

sold

.Examine on a test basis the purchase invoices and receiving reports or several days aterthe inventory date




Di!!icult": Moerate$earning %&ecti(e: +


!1. hich o the ollo#ing procedures #ould an auditor ordinarily perorm during the revie#

o subse'uent eventsA.An analysis o related party transactions or the discovery o possible irregularities

3.A revie# o the cut-o ban+ statements or the period ater the year-end

C$An in'uiry o the client*s legal counsel concerning litigation

.An investigation o material #ea+nesses in internal control previously communicated tothe client

AACSB: Anal"tic

AICPA BB: Critical ThinkingAICPA FN: Measurement


Di!!icult": Moerate



17-!$


35/61


!2. hich o the ollo#ing is notan audit procedure that the independent auditor #ould

perorm #ith respect to litigation0 claims and assessmentsA.&n'uire o and discuss #ith management the policies and procedures adopted or

identiying0 evaluating0 and accounting or litigation0 claims0 and assessments

3.>btain rom management a description and evaluation o litigation0 claims0 andassessments that existed at the balance sheet dateC.>btain assurance rom management that it has disclosed all unasserted claims that the

la#yer has advised are li+ely to be asserted and must be disclosed

%$Conirm directly #ith the client*s la#yer that all claims have been recorded in the inancialstatements

AACSB: Anal"tic



Di!!icult": Moerate$earning %&ecti(e: +


!!. An attorney is responding to an independent auditor as a result o the audit client*s letter o

in'uiry. The attorney may appropriately limit the response toA.Asserted claims and litigation

&$:atters to #hich the attorney has given substantive attention in the orm o legal

consultation or representation

C.Asserted0 overtly threatened0 or pending claims and litigation.&tems #hich have an extremely high probability o being resolved to the client*s detriment


AICPA BB: Critical ThinkingAICPA FN: Measurement

Bloom's: Knowlege

Di!!icult": Moerate



17-!%


36/61


!$. hich o the ollo#ing is generally re'uested in a legal letter

A$A re'uest that the attorney comment on unasserted claims #here his or her vie#s dierrom management*s evaluation

3.A list o all attorneys that perormed any #or+ or the entity during the year

C.A statement indicating that the attorney is responsible or the air presentation ounasserted claims in the entity*s inancial statements.A re'uest that the attorney provide a copy o all invoices given to the client during the year



AICPA FN: MeasurementBloom's: Knowlege

Di!!icult": #as"


!%. hich o the ollo#ing subse'uent events #ill be least li+ely to result in an ad(ustment tothe inancial statements

A.Culmination o events aecting the realiation o accounts receivable o#ned as o thebalance sheet date

3.Culmination o events aecting the realiation o inventories o#ned as o the balance sheet

dateC.:aterial changes in the settlement o liabilities #hich #ere estimated as o the balance

sheet date

%$:aterial changes in the 'uoted mar+et prices o listed investment securities since thebalance sheet date



AICPA FN: 1e*ortingBloom's: Anal"sis

Di!!icult": Moerate


17-!)


37/61


!). ubse'uent events or #hich the auditor has a responsibility to actively search are deined

as events #hich occur subse'uent to theA.3alance sheet date

3.ate o the auditor*s report

C$3alance sheet date but prior to the date o the auditor*s report.ate o the auditor*s report and concern contingencies #hich are not relected in theinancial statements


AICPA BB: $egal


Di!!icult": Moerate


!7. An auditor is concerned #ith completing various phases o the examination ater thebalance sheet date. This 9subse'uent period9 involving ormal auditor procedures extends to

the date o the

A$Auditor*s report

3.Final revie# o the audit #or+ing papers

C.4ublic issuance o the inancial statements.elivery o the auditor*s report to the client


AICPA BB: $egal


Di!!icult": Moerate


17-!7


38/61


!,. A ma(or customer o an audit client suers a ire ater year end0 but (ust prior to

completion o audit ield #or+. The audit client believes that this event could have asigniicant direct eect on the inancial statements. The auditor should

A$Advise management to disclose the event in notes to the inancial statements

3.isclose the event in the auditor*s reportC.ithhold submission o the auditor*s report until the extent o the direct eect on theinancial statements is +no#n

.Advise management to ad(ust the inancial statements

AACSB: CommunicationsAICPA BB: Inustr"

AICPA FN: 1e*orting

Bloom's: Anal"sis

Di!!icult": Moerate


!. & an auditor dates the auditor*s report on inancial statements or the year ended

ecember !10 2//0 as o February 1/0 2/1/0 except or =ote 60 as to #hich the date is :arch!0 2/1/0 the auditor is ac+no#ledging responsibility to actively search or and ensure proper

handling by management o

A.All subse'uent events occurring through :arch !0 2/1/3.All subse'uent events occurring through February 1/0 2/1/

C$All subse'uent events occurring through February 1/0 2/1/ and the speciic subse'uent

event reerred to in =ote 6 through :arch !0 2/1/.>nly the speciic subse'uent event reerred to in =ote 6 as o :arch !0 2/1/




Di!!icult": Moerate


17-!,


39/61


$/. 8arvey0 C4A is preparing an audit program or the purpose o ascertaining the occurrence

o subse'uent events that may re'uire ad(ustment or disclosure essential to a air presentationo the inancial statements in conormity #ith generally accepted accounting principles.

hich one o the ollo#ing procedures #ould be least appropriate or this purpose

A$Conirm0 as o the completion o ield #or+0 accounts receivable that have increasedsigniicantly rom the year-end date3."ead the minutes o the board o directors

C.&n'uire o management concerning events that may have occurred

.>btain a la#yer*s letter as o the completion o ield #or+


AICPA BB: $egal

AICPA FN: 1e*orting


Di!!icult": Moerate$earning %&ecti(e: 2

$1. A Type && subse'uent event usually re'[email protected] ad(ustment to the inancial statements and the ootnotes

3.An ad(ustment to the inancial statements but no special disclosure is re'uired

C$isclosure in the ootnotes.=either an ad(ustment to the inancial statements nor disclosure in the ootnotes

AACSB: Anal"tic

AICPA BB: $egal


Di!!icult": Moerate


17-!


40/61


$2. Ater ield #or+ audit procedures are completed0 a partner o the C4A irm #ho has not

been involved in the audit perorms a second or #rap-up revie# o the #or+ing papers. Thissecond revie# usually ocuses on

A$The audit report0 inancial statements0 and ootnotes or consistency

3.&rregularities involving the client*s management and its employeesC.The materiality o the ad(usting entries proposed by the audit sta.The communication o internal control #ea+nesses to those charged #ith governance


AICPA BB: Inustr"

AICPA FN: 1isk Anal"sisBloom's: Knowlege

Di!!icult": Moerate


$!. &n the course o the examination o inancial statements or the purpose o expressing anopinion0 the auditor normally prepares a schedule o unad(usted dierences or #hich the

auditor did not propose ad(ustments #hen they #ere discovered. hat is the primary purposeo this schedule

A.To point out to the responsible client oicials the errors made by various company

personnel3.To summarie the ad(ustments that must be made beore the company can prepare and

submit its ederal tax return

C$To identiy the potential inancial statement eects o errors or disputed items that #ereconsidered immaterial #hen discovered

.To summarie the errors made by the company so that corrections can be made ater the

audited inancial statements are released



AICPA FN: 1e*orting

Bloom's: Anal"sis

Di!!icult": Moerate$earning %&ecti(e: /

17-$/


41/61


$$. hich o the ollo#ing ratios is least li+ely to assist the auditor in determining #hether

the client is experiencing inancial diicultiesA.=et #orthBtotal liabilities

&$CashBtotal assets

C.Total liabilitiesBtotal assets.=et income beore taxesBnet sales

AACSB: Anal"tic



Bloom's: Anal"sisDi!!icult": Moerate


$%. As part o an audit0 a C4A oten re'uests a representation letter rom the client. hich

one o the ollo#ing is not a valid purpose o such a letterA.To provide audit evidence

3.To emphasie to the client their responsibility or the airness o the inancial statements

C$To satisy himsel or hersel that a certain account balance is airly stated #hen certain

customary auditing procedures are not perormed

.To provide possible protection to the C4A against a charge o +no#ledge in cases #hereraud is subse'uently discovered to have existed in the accounts


AICPA BB: Inustr"


Di!!icult": Moerate


17-$1


42/61


$). hich o the ollo#ing expressions is least li+ely to be included in a client*s

representation letterA.=o events have occurred subse'uent to the balance sheet date that re'uire ad(ustment to or

disclosure in0 the inancial statements

3.The company has complied #ith all aspects o contractual agreements that #ould have amaterial eect on the inancial statements in the event o noncompliance

C$:anagement ac+no#ledges responsibility or illegal actions committed by its employees

.:anagement has made available all inancial statements and related data


AICPA FN: 1e*orting


Di!!icult": Moerate


$7. 9There are no violations or possible violations o la#s or regulations #hose eects should

be considered or disclosure in the inancial statements or as a basis or recording a losscontingency.9 The oregoing passage most li+ely is rom a;ann :arch 20 the C4A learned that0 on

February 110 the entity incurred a material loss on an uncollectible trade receivable as a result

o the ongoing deterioration o the inancial condition o the entity*s principal customer0#hich inally led to the customer*s ban+ruptcy. :anagement then reused to ad(ust the

inancial statements or this subse'uent event. The C4A determined that the inormation is

reliable and that there are creditors currently relying on the inancial statements. The C4A*snext course o action most li+ely #ould be to

A.=otiy the entity*s creditors that the inancial statements and the related auditor*s report

should no longer be relied upon&$=otiy each member o the entity*s board o directors about management*s reusal to ad(ustthe inancial statements

C.&ssue revised inancial statements and distribute them to each creditor +no#n to be relying

on the inancial statements.&ssue a revised auditor*s report and distribute it to each creditor +no#n to be relying on the

inancial statements



Di!!icult": 4ar

$earning %&ecti(e: ))

17-$%


46/61


%%. Ater an audit report containing an un'ualiied opinion on a nonpublic client*s inancial

statements is issued0 the auditor learns that the client has decided to sell the shares o asubsidiary that accounts or !/ percent o its revenue and 2% percent o its net income. The

auditor should

A.etermine #hether the inormation is reliable and0 i it is determined to be reliable0 re'uestthat revised inancial statements be issued3.=otiy the entity that the auditor*s report may no longer be associated #ith the inancial

statements

C.escribe the eects o this subse'uently discovered inormation in communications #ithpersons +no#n to be relying on the inancial statements

%$Ta+e no action because the auditor has no obligation to ma+e any urther in'uiries


AICPA BB: $egalAICPA FN: 1e*orting

Bloom's: Anal"sis

Di!!icult": Moerate


%). An auditor*s client has violated a minor re'uirement o its bond indenture #hich could

result in the trustee re'uiring immediate payment o the principal amount due. The clientreuses to see+ a #aiver rom the bond trustee. "e'uest or immediate payment is not

considered li+ely. Dnder these circumstances the auditor must

A."e'uire classiication o bonds payable as a current liability3.Contact the bond trustee directly

C$isclose the situation in the auditor*s report

.>btain an opinion rom the company*s attorney as to the li+elihood o the trustee*senorcement o the re'uirement


AICPA BB: $egal

AICPA FN: 1e*orting

Bloom's: A**licationDi!!icult": 4ar



17-$)


47/61


%7. Auditors oten re'uest that the audit client send a letter o in'uiry to those attorneys #ho

have been consulted #ith respect to litigation0 claims0 or assessments. The primary reason orthis re'uest is to provide the auditor #ith

A.An estimate o the dollar amount o the probable loss

3.An expert opinion as to #hether a loss is possible0 probable0 or remoteC.&normation concerning the progress o cases to date

%$Corroborative in'uiries made o the client by the auditor


AICPA BB: Inustr"


Di!!icult": 4ar


%,. The primary reason an auditor re'uests letters o in'uiry be sent to a client*s attorneys is toprovide the auditor #ith

A.A description and evaluation o litigation0 claims0 and assessments that existed at the dateo the balance sheet

3.An expert opinion as to #hether a loss is possible0 probable0 or remote

C.The opportunity to examine the documentation concerning litigation0 claims0 andassessments

%$Corroboration o the inormation urnished by management concerning litigation0 claims0

and assessments


AICPA BB: Inustr"


Bloom's: Knowlege

Di!!icult": 4ar$earning %&ecti(e: ,

17-$7


48/61


%. hich o the ollo#ing statements extracted rom a client*s la#yer*s letter concerning

litigation0 claims0 and assessments most li+ely #ould cause the auditor to re'uestclariication

A.9& believe that the possible liability to the company is nominal in amount.9

&$9& believe that the action can be settled or less than the damages claimed.9C.9& believe that the plainti*s case against the company is #ithout merit.9.9& believe that the company #ill be able to deend this action successully.9



AICPA FN: Decision MakingBloom's: Anal"sis

Di!!icult": 4ar


)/. An auditor*s decision concerning #hether or not to 9dual date9 the audit report is basedupon the auditor*s #illingness to

A$Extend auditing procedures3.Accept responsibility or all events bet#een year-end and the audit report date

C.4ermit inclusion o a ootnote captioned@ event ;unaudited< subse'uent to the date o the

auditor*s report.Assume responsibility or events subse'uent to the issuance o the auditor*s report




Di!!icult": 4ar


)1. A Type & subse'uent event usually re'uires@

A$An ad(ustment to the inancial statements

3.=o ad(ustment to the inancial statementsC.ithdra#al rom the engagement

.=one o the above


AICPA FN: 1e*orting

Bloom's: Knowlege

Di!!icult": #as"


17-$,


49/61


)2. A disclosure o a contingent liability in the ootnotes is made rather than ad(usting the

inancial statement accounts #[email protected] outcome o the event is (udged to be reasonably possible and the loss can be

reasonably estimated.

3.The loss can be reasonably estimated0 but the outcome is un+no#n.C$The outcome o the event is (udged to be reasonably possible but the loss cannot bereasonably estimated.

.The outcome is un+no#n and the loss is reasonably estimable but the client does not #ant

to boo+ the loss.



AICPA FN: 1e*orting



)!. hich o the ollo#ing statements ordinarily is included among the #ritten clientrepresentations obtained by the auditor

A$Compensating balances and other arrangements involving restrictions on cash balances

have been disclosed3.:anagement ac+no#ledges responsibility or illegal actions committed by employees

C.uicient evidential matter has been made available to permit the issuance o an

un'ualiied opinion.:anagement ac+no#ledges that there are no material #ea+nesses in the account balances


AICPA BB: Inustr"


Di!!icult": 4ar


17-$


50/61


)$. hich o the ollo#ing statements is correct about an auditor*s re'uired communication

#ith management and those charged #ith governanceA.Any matters communicated to those charged #ith governance are also re'uired to be

communicated to the entity*s management

&$The auditor is re'uired to inorm those charged #ith governance about signiicant errorsdiscovered by the auditor and subse'uently corrected by managementC.The auditor does not have any re'uirement to communicate #ith anyone outside o

management

.ea+nesses in internal control previously reported to those charged #ith governance arere'uired to be communicated to those charged #ith governance ater each subse'uent audit

until the #ea+nesses are corrected



Bloom's: Knowlege

Di!!icult": 4ar


)%. hich o the ollo#ing statements is correct concerning an auditor*s re'uired

communication #ith those charged #ith governanceA.This communication is re'uired to occur beore the auditor*s report on the inancial

statements is issued

&$This communication should include management changes in the application o signiicantaccounting policies

C.Any signiicant matter communicated to those charged #ith governance also should be

communicated to management.igniicant audit ad(ustments proposed by the auditor and recorded by management neednot be communicated to those charged #ith governance




Di!!icult": 4ar


17-%/


51/61


)). For #hich o the ollo#ing matters should an auditor obtain #ritten management

representationsA.:anagement*s cost-beneit (ustiications or not correcting internal control #ea+nesses

3.:anagement*s +no#ledge o uture plans that may aect the price o the entity*s stoc+

C$:anagement*s compliance #ith contractual agreements that may aect the inancialstatements.:anagement*s ac+no#ledgment o its responsibility or employees* violations o la#s


AICPA BB: Inustr"

AICPA FN: Decision MakingBloom's: A**lication

Di!!icult": 4ar


)7. ey Co. plans to present comparative inancial statements or the years ended ecember!10 2//, and 2//0 respectively. mith0 C4A0 audited ey*s inancial statements or both

years and plans to report on the comparative inancial statements on :ay 10 2/1/. ey*scurrent management team #as not present until 6anuary 10 2//. hat period o time should

be covered by ey*s management representation letter

A.6anuary 10 2//, through ecember !10 2//

&$6anuary 10 2//, through :ay 10 2/1/

C.6anuary 10 2// through ecember !10 2//

.6anuary 10 2// through :ay 10 2/1/


AICPA BB: $egal

AICPA FN: 1e*orting


Di!!icult": 4ar$earning %&ecti(e: 2

17-%1


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),. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther

in'uiries #ith respect to audited inancial statements covered by an auditor*s report unlessA.A la#suit in #hich ris+ o loss #as considered remote is resolved in the company*s avor

3.A development occurs #hich may aect the client*s ability to continue as a going concern

C.A material raud is initiated by an employee ater the report is issued%$Evidence o signiicant0 non-arms-length0 related party transactions that happened prior toyear-end is discovered


AICPA BB: $egal


Di!!icult": 4ar


). Ater an auditor has issued an audit report on a nonpublic entity0 there is no obligation toma+e any urther audit tests or in'uiries #ith respect to the audited inancial statements

covered by that report unless

A$=e# inormation comes to the auditor*s attention concerning an event that occurred prior

to the date o the auditor*s report that may have aected the auditor*s report

3.:aterial adverse events occur ater the date o the auditor*s reportC.Final determination or resolution #as made on matters that had resulted in a 'ualiication

in the auditor*s report

.Final determination or resolution #as made o a contingency that had been disclosed in theinancial statements and no liability arose rom the resolution


AICPA BB: $egal


Di!!icult": 4ar


17-%2


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7/. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther

in'uiries #ith respect to audited inancial statements covered by that report unlessA.A inal resolution o a contingency that had resulted in a 'ualiication o the auditor*s

report is made

3.A development occurs that may aect the client*s ability to continue as a going concernC.An investigation o the auditor*s practice by a peer revie# committee ensues

%$=e# inormation is discovered concerning undisclosed related party transactions o the

previously audited period

AACSB: CommunicationsAICPA BB: $egal

AICPA FN: 1e*orting


Di!!icult": 4ar


71. ho generally signs the legal letter

A.The board o directors3.The audit partner

C$The CE> o the entity being audited

.The entity*s attorneys

AACSB: Anal"tic



Bloom's: KnowlegeDi!!icult": Moerate


Short Answer Questions

17-%!


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72. A discrimination la#suit is pending or your client0 4retty 4eople &ncorporated. hat

inormation about the la#suit #ould you as an auditor need to +no# to decide #hether todisclose the litigation in the inancial statements

& a negative outcome o the la#suit is probable and the amount o the contingency can beestimated0 the amount #ill have to be charged to income and appear as a liability in the

inancial statements. & the event has a reasonably possible chance o having a negativeoutcome or the amount cannot be estimated0 the contingency should be disclosed in the

ootnotes o the inancial statements. =o disclosure is necessary or contingencies the

li+elihood o occurrence or #hich is remote.


AICPA BB: Inustr"

AICPA FN: 1e*orting



17-%$


55/61


7!. eine the term 9contingent liability9 and discuss the criteria used to classiy these events

or conditions. 4rovide some example o contingent liabilities.

A contingent liability is deined as an existing condition0 situation0 or set o circumstances

involving uncertainty as the possible loss to an entity that #ill ultimately be resolved #hensome uture event occurs or ails to occur. FA3 AC Topic $%/0 9Contingencies09 states that

#hen a contingent liability exists0 the li+elihood that the uture event #ill result in a loss orimpairment o an asset or the incurrence o a liability can be classiied into three categories@

4robable. The uture event is li+ely to occur. & the event is probable and the amount o the

loss can be reasonably estimated0 the loss is accrued by a charge to income.

"easonably possible. The chance o the uture event occurring is more than remote but lessthan li+ely. hen the outcome o the event is (udged to be reasonably possible or the amount

cannot be estimated0 a disclosure o the contingency is made in the ootnotes to the inancial

statements."emote. The chance o the uture event occurring is slight. &n general0 loss contingencies that

are (udged to be remote are not disclosed in the ootnotes.Examples o contingent liabilities include@ pending or threatened litigation0 actual or possibleclaims and assessments0 income tax disputes0 product #arranties or deects0 guarantees o

obligations to others0 and agreements to repurchase receivables that have been sold.


AICPA BB: Inustr"

AICPA FN: 1e*orting

Bloom's: Knowlege


17-%%


56/61


7$. From the list belo#0 select the procedures that an auditor #ould use to test or contingent

liabilities.a. &n'uire o EC oicials regarding reported violations by the client #hich create claims

b. "ead the client*s contracts0 loan agreements0 leases0 and other documents

c. "ead the client*s minutes o meetings o shareholders0 directors0 and committeesd. "e'uest a representation letter rom all the client*s employeese. "ead the legal bries o all suits iled against the client*s competitors

. "e'uest the client*s management to prepare a letter o in'uiry to the client*s attorney

regarding pending litigation against the client

b0 c and are procedures typically used by auditors to test or contingent liabilities.


AICPA BB: Inustr"


Di!!icult": Moerate


7%. hile auditing other business processes0 an auditor may identiy inormation about

contingent liabilities. hat speciic audit procedures relating to other business processes

could uncover these liabilities

"eading the minutes o the board o directors and committees o the board and stoc+holders

"evie#ing contracts0 loan agreements0 leases0 and correspondence rom government

agencies"evie#ing income tax liability0 tax returns0 and &" agents* reports

Conirming or other#ise documenting guarantees and letters o credit obtained rom

inancial institutions or other lending agencies

&nspecting other documents or possible guarantees


AICPA BB: Inustr"AICPA FN: Measurement


Di!!icult": Moerate


17-%)


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7). hat inormation is typically re'uested in a legal letter to a client*s attorney

A list and evaluation o any pending or threatened litigation to #hich the attorney has

devoted substantial attention

A list o unasserted claims and assessments considered by management to be probable oassertion and reasonably possible o unavorable outcome

A description and evaluation o the outcome o each pending or threatened litigation

Additions to the list provided by management or a statement that the list is complete

Comment on unasserted claims #here his or her vie#s dier rom management*s evaluation


AICPA BB: Inustr"


Bloom's: Knowlege

Di!!icult": Moerate$earning %&ecti(e: ,

77. hat is an unasserted claim and #hy #ould an attorney andBor client be reluctant todisclose an unasserted claim in the inancial statements

An unasserted claim is one in #hich the in(ured party or potential claimant has not yet

notiied the entity o a possible claim. The attorney may be reluctant to provide inormation

on such claims due to client-attorney privilege. Also0 both the client and the attorney may beconcerned that disclosing the unasserted claims could lead to the claims actually occurring.


AICPA FN: 1e*orting


Di!!icult": #as"


17-%7


58/61


7,. hat is the dierence bet#een contingent liabilities and commitments

Contingent liabilities are an existing condition0 situation0 or set o circumstances involving

uncertainty as to possible loss to an entity that #ill ultimately be resolved by some uture

event. A commitment is an agreement made by the entity to a set o ixed conditions. Theconditions in a commitment are speciied in advance.


AICPA BB: Inustr"


Bloom's: Knowlege



7. &dentiy the t#o primary types o subse'uent events that re'uire consideration bymanagement and evaluation by the auditor and give t#o examples o each type.

Events that provide additional evidence about conditions that existed at the date o the

balance sheet and aect the estimates that are part o the inancial statement preparation

process ;Type & events


59/61


Auditing standards ;AD !$1< indicate that the auditor has a responsibility to evaluate #hether

there is substantial doubt about an entity*s ability to continue as a going concern or areasonable period o time ;deined as one year beyond the date o the inancial statements

being audited


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,2. tate the t#o primary purposes o the client letter o representation.

To corroborate oral representations made to the auditor and to document the continued

appropriateness o such representations

To reduce the possibility o misunderstanding concerning management*s responses to theauditor*s in'uiries


AICPA BB: Critical ThinkingAICPA FN: 1e*orting

Bloom's: Knowlege

Di!!icult": #as"


,!. The ield #or+ or the ecember !10 2// audit o 4ump+in Corporation ended on :arch1!0 2/1/. The inancial statements and auditor*s report #ere issued and mailed to stoc+holders

on :arch 2!0 2/1/. &n each o the situations belo#0 select rom the list at the end o theproblem the appropriate action to be ta+en by the auditor. Assume all situations are material.

Situations:

1< >n April %0 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the entireuninsured inventory in one o 4ump+in*s #arehouses.

2< >n February 170 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the

entire uninsured inventory in one o 4ump+in*s #arehouses.!< >n February 170 2/1/0 you discovered that on =ovember !/0 2//0 a lood destroyed the

entire uninsured inventory in one o 4ump+in*s #arehouses.

$< >n April %0 2/1/0 you discovered that on :arch !/0 2/1/0 a ire destroyed one o4ump+in*s 1/ plants.%< >n April 70 2/1/0 you discovered that a debtor o 4ump+in #ent ban+rupt on 6anuary )0

2/1/.

)< >n 6anuary 1)0 2/1/0 a la#suit #as iled against 4ump+in or a patent inringement actionthat allegedly too+ place in early 1. &n the opinion o 4ump+in*s attorneys0 there is a

reasonable ;but not probable< danger o a signiicant loss to 4ump+in.

7< >n February 10 2/1/0 4ump+in settled a la#suit out o court that had originated in 1,and is currently listed as a contingent liability.

17-)/


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Possile Actions:

a. Ad(ust the ecember !10 2// inancial statements.b. isclose the inormation in a ootnote in the ecember !10 2// inancial statements

c. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The

revision should involve an ad(ustment to the ecember !10 2// inancial statements.d. "e'uest the client revise and reissue the ecember !10 2// inancial statements. Therevision should involve the addition o a ootnote0 but no ad(ustment0 to the ecember !10

2// inancial statements.

e. =o action is re'uired.

1. d 2. b !. a $. e %. c ). b 7. a


AICPA BB: $egal


Di!!icult": 4ar



Auditing & Accounting Chapter 17 TB

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