Auditing & Accounting Chapter 17 TB

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 identi y unrecorded contingent liabilities. 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 balance sho#n on the inancial statements. True False
). An example o a Type & event or condition is the settlement o a la#suit a ter the balance sheet date or an amount di erent 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 a ter the balance sheet date. True False
,. -ual dating is used to identi y unrecorded contingent liabilities. True False
.. The auditor must per orm inal analytical procedures be ore 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 in ormation about management*s plans to mitigate the problem and assess the li+elihood that such plans can be implemented. True False
Multiple Choice Questions
11. 1hen auditing contingent liabilities0 #hich o the ollo#ing procedures #ould be least e ective2 A. "eading the minutes o the board o directors 3. "evie#ing the ban+ con irmation letter C. Examining customer con irmation replies -. Examining invoices or pro essional services
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12. 1hen obtaining evidence regarding litigation against a client0 the C4A #ould be least interested in determining A. 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 un avorable outcome -. An estimate o the potential loss
1!. The auditor*s primary means o obtaining corroboration o management*s in ormation 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. Con irmation o claims and assessments rom the other parties to the litigation -. Con irmation o claims and assessments rom an o icer 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 the A. 4eriod in #hich the underlying cause or legal action occurred 3. 4robability o an un avorable 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. 7ubstantiate accruals 3. Assess the legal rami ications o litigation in progress C. Estimate the dollar amount o contingent liabilities -. &denti y possible unasserted litigation0 claims0 and assessments
1). & a la#yer re uses to urnish corroborating in ormation regarding litigation0 claims0 and assessments0 the auditor should A. 8onor the con identiality o the client-la#yer relationship 3. Consider the re usal to be a scope limitation C. 7ee+ to obtain the corroborating in ormation rom management -. -isclose this act in a ootnote to the inancial statements
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17. The re usal o a client*s attorney to provide a representation on the legality o a particular act committed by the client is generally A. 7u icient reason to issue a 9sub(ect to9 'uali ied opinion 3. Considered to be a scope limitation C. &nsu icient reason to modi y the auditor*s report because o the attorney*s obligation o con identiality -. 4roper grounds to #ithdra# rom the engagement #ithout urther consideration
1,. 1hich o the ollo#ing material events occurring subse'uent to the balance sheet date #ould re'uire an ad(ustment to the inancial statements be ore they could be issued2 A. 7ale 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 -. 7ettlement o litigation0 in excess o the previously recorded liability
1.. 1hich o the ollo#ing situations #ould re'uire ad(ustment to or disclosure in the inancial statements2 A. 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 i agreement is success ul -. 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 is A. A tornado that destroys a client*s actory a ter the balance sheet date 3. An event a ter the balance sheet date that con irms 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 obsolete C. =oti ication o an &"7 audit a ter the balance sheet date -. The client*s 3oard o -irectors unexpectedly resigns a ter 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 a ter the completion o ield #or+ but be ore issuance o the auditor*s report. The auditor*s responsibility or events occurring subse'uent to the completion o ield #or+ #as A. 5imited to the speci ic event re erenced 3. 5imited to include only events occurring be ore the date o the last subse'uent event re erenced C. 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. 1hich o the ollo#ing procedures should an auditor generally per orm regarding subse'uent events2 A. Compare the latest available interim inancial statements issued a ter year-end #ith the inancial statements being audited 3. 7end second re'uests to the client*s customers #ho ailed to respond to initial accounts receivable con irmation re'uests C. Communicate material #ea+nesses in internal controls to those charged #ith governance -. "evie# the cuto ban+ statements or several months a ter year-end
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
2$. 1hich o the ollo#ing auditing procedures is ordinarily per ormed last2 A. Con irming accounts payable 3. 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 re erred to in the notes to the inancial statements 3. 3alance sheet date C. -ate o the auditor*s report -. -ate o the engagement agreement
2). 1hich o the ollo#ing items should an auditor communicate to those charged #ith governance in a publicly-held entity2 A. 7igni icant audit ad(ustments recorded by the entity and management*s consultation #ith other accountants about signi icant accounting matters 3. 7igni icant audit ad(ustments recorded by the entity but not management*s consultation #ith other accountants about signi icant accounting matters C. :anagement*s consultation #ith other accountants about signi icant accounting matters but not signi icant audit ad(ustments recorded by the entity -. =either signi icant audit ad(ustments recorded by the entity nor management*s consultation #ith other accountants about signi icant accounting matters
27. The management letter is used A. To allo# management to corroborate oral representations to the auditor 3. To con irm the terms o the audit engagement C. 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 a iliate o the audit client and is audited by another audit irm. 1hich o the ollo#ing is most li+ely to be used by the auditor to obtain assurance that all guarantees by the client o the a iliate*s indebtedness have been detected2 A. 7end the standard ban+ con irmation re'uest to all the client*s lender ban+s 3. "evie# client minutes and obtain a representation letter C. Examine supporting documents or all entries in intercompany accounts -. >btain #ritten con irmation o indebtedness rom the auditor o the a iliate
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2.. ?enerally0 loss contingencies that are (udged to be remote@ A. 7hould be disclosed in the ootnotes 3. 7hould be recorded in the inancial statements C. 7hould not be disclosed in the ootnotes -. 7hould be recorded in the inancial statements and the ootnotes
!/. 1hich o the ollo#ing procedures #ould an auditor most li+ely per orm to obtain evidence about an entity*s subse'uent events2 A. "econcile ban+ activity or the month a ter the balance sheet date #ith cash activity re lected in the accounting records 3. >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 a ter the inventory date
!1. 1hich o the ollo#ing procedures #ould an auditor ordinarily per orm during the revie# o subse'uent events2 A. An analysis o related party transactions or the discovery o possible irregularities 3. A revie# o the cut-o ban+ statements or the period a ter 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 to the client
!2. 1hich o the ollo#ing is not an audit procedure that the independent auditor #ould per orm #ith respect to litigation0 claims and assessments2 A. &n'uire o and discuss #ith management the policies and procedures adopted or identi ying0 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 the la#yer has advised are li+ely to be asserted and must be disclosed -. Con irm directly #ith the client*s la#yer that all claims have been recorded in the inancial statements
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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 to A. Asserted claims and litigation 3. :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
!$. 1hich o the ollo#ing is generally re'uested in a legal letter2 A. A re'uest that the attorney comment on unasserted claims #here his or her vie#s di er rom management*s evaluation 3. A list o all attorneys that per ormed 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
!%. 1hich o the ollo#ing subse'uent events #ill be least li+ely to result in an ad(ustment to the inancial statements2 A. Culmination o events a ecting the realiAation o accounts receivable o#ned as o the balance sheet date 3. Culmination o events a ecting the realiAation o inventories o#ned as o the balance sheet date C. :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 the balance sheet date
!). 7ubse'uent events or #hich the auditor has a responsibility to actively search are de ined 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 re lected in the inancial statements
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!7. An auditor is concerned #ith completing various phases o the examination a ter the balance 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
!,. A ma(or customer o an audit client su ers a ire a ter year end0 but (ust prior to completion o audit ield #or+. The audit client believes that this event could have a signi icant direct e ect 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. 1ithhold submission o the auditor*s report until the extent o the direct e ect on the inancial 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 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 speci ic subse'uent event re erred to in =ote 6 through :arch !0 2/1/ -. >nly the speci ic subse'uent event re erred 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 con ormity #ith generally accepted accounting principles. 1hich one o the ollo#ing procedures #ould be least appropriate or this purpose2 A. Con irm0 as o the completion o ield #or+0 accounts receivable that have increased signi icantly rom the year-end date 3. "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+
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$1. A Type && subse'uent event usually re'uires@ A. An 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
$2. A ter ield #or+ audit procedures are completed0 a partner o the C4A irm #ho has not been involved in the audit per orms 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 consistency 3. &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 di erences or #hich the auditor did not propose ad(ustments #hen they #ere discovered. 1hat is the primary purpose o this schedule2 A. To point out to the responsible client o icials the errors made by various company personnel 3. To summariAe the ad(ustments that must be made be ore the company can prepare and submit its ederal tax return C. To identi y the potential inancial statement e ects o errors or disputed items that #ere considered immaterial #hen discovered -. To summariAe the errors made by the company so that corrections can be made a ter the audited inancial statements are released
$$. 1hich o the ollo#ing ratios is least li+ely to assist the auditor in determining #hether the client is experiencing inancial di iculties2 A. =et #orthBtotal liabilities 3. CashBtotal assets C. Total liabilitiesBtotal assets -. =et income be ore taxesBnet sales
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$%. As part o an audit0 a C4A o ten re'uests a representation letter rom the client. 1hich one o the ollo#ing is not a valid purpose o such a letter2 A. To provide audit evidence 3. To emphasiAe to the client their responsibility or the airness o the inancial statements C. To satis y himsel or hersel that a certain account balance is airly stated #hen certain customary auditing procedures are not per ormed -. 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
$). 1hich o the ollo#ing expressions is least li+ely to be included in a client*s representation letter2 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 a material e ect 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 e ects should be considered or disclosure in the inancial statements or as a basis or recording a loss contingency.9 The oregoing passage most li+ely is rom a;an< A. Client engagement letter 3. "eport on compliance #ith la#s and regulations C. :anagement representation letter -. Attestation report on internal controls
$,. 1hich o the ollo#ing matters is an auditor re'uired to communicate to those charged #ith governance2 A. The basis or assessing control ris+ belo# the maximum 3. The process used by management in ormulating sensitive accounting estimates C. The auditor*s preliminary (udgments about materiality levels -. The (usti ication or per orming substantive procedures at interim dates
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$.. 9There have been no communications rom regulatory agencies concerning noncompliance #ith or de iciencies in0 inancial reporting practices that could have a material e ect on the inancial statements.9 The oregoing passage is most li+ely rom a A. "eport on internal control 3. 7pecial report C. :anagement representation letter -. 5etter or under#riters
%/. 1hen considering the use o management*s #ritten representations as audit evidence about the completeness assertion0 an auditor should understand that such representations A. Complement0 but do not replace0 substantive procedures designed to support the assertion 3. Constitute su icient evidence to support the assertion #hen considered in combination #ith reliance on internal controls C. Are not part o the evidential matter considered to support the assertion -. "eplace reliance on internal controls as evidence to support the assertion
%1. A #ritten representation rom a client*s management that0 among other matters0 ac+no#ledges responsibility or the air presentation o inancial statements should normally be signed by the A. Chie executive o icer and the chie inancial o icer 3. Chie inancial o icer and the chairman o the board o directors C. Chairman o the audit committee o the board o directors -. Chie executive o icer0 the chairman o the board o directors and the client*s la#yer
%2. Communications bet#een the auditor and those charged #ith governance should include all o the ollo#ing except A. A summary o speci ic audit procedures used 3. 7igni icant audit ad(ustments C. Consultations #ith other accountants -. :a(or issues discussed #ith management be ore the auditor #as retained
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%!. 1hich o the ollo#ing events occurring a ter the issuance o a client*s inancial statements and the auditor*s report most li+ely #ould cause the auditor to ma+e urther in'uiries about the previously issued inancial statements2 A. An uninsured natural disaster occurs that may a ect the entity*s ability to continue as a going concern 3. A contingency is resolved that had been disclosed in the audited inancial statements C. =e# in ormation is discovered concerning undisclosed lease transactions in the audited period -. A subsidiary that accounts or 2%C o the entity*s consolidated net income is sold
%$. >n February 2%0 a C4A issued an auditor*s report expressing an un'uali ied opinion on inancial statements or the year ended 6anuary !1. >n :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 re used to ad(ust the inancial statements or this subse'uent event. The C4A determined that the in ormation is reliable and that there are creditors currently relying on the inancial statements. The C4A*s next course o action most li+ely #ould be to A. =oti y the entity*s creditors that the inancial statements and the related auditor*s report should no longer be relied upon 3. =oti y each member o the entity*s board o directors about management*s re usal to ad(ust the 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
%%. A ter an audit report containing an un'uali ied opinion on a nonpublic client*s inancial statements is issued0 the auditor learns that the client has decided to sell the shares o a subsidiary that accounts or !/ percent o its revenue and 2% percent o its net income. The auditor should A. -etermine #hether the in ormation is reliable and0 i it is determined to be reliable0 re'uest that revised inancial statements be issued 3. =oti y the entity that the auditor*s report may no longer be associated #ith the inancial statements C. -escribe the e ects o this subse'uently discovered in ormation in communications #ith persons +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
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%). 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 client re uses 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 classi ication o bonds payable as a current liability 3. 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*s en orcement o the re'uirement
%7. Auditors o ten 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 loss 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. &n ormation 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 #ith A. 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 remote C. The opportunity to examine the documentation concerning litigation0 claims0 and assessments -. Corroboration o the in ormation urnished by management concerning litigation0 claims0 and assessments
%.. 1hich 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 clari ication2 A. 9& believe that the possible liability to the company is nominal in amount.9 3. 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 de end this action success ully.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 to A. 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 the auditor*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 statements 3. =o ad(ustment to the inancial statements C. 1ithdra#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 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 be reasonably estimated. -. The outcome is un+no#n and the loss is reasonably estimable but the client does not #ant to boo+ the loss.
)!. 1hich o the ollo#ing statements ordinarily is included among the #ritten client representations obtained by the auditor2 A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed 3. :anagement ac+no#ledges responsibility or illegal actions committed by employees C. 7u icient evidential matter has been made available to permit the issuance o an un'uali ied opinion -. :anagement ac+no#ledges that there are no material #ea+nesses in the account balances
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)$. 1hich o the ollo#ing statements is correct about an auditor*s re'uired communication #ith management and those charged #ith governance2 A. 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 in orm those charged #ith governance about signi icant errors discovered by the auditor and subse'uently corrected by management C. The auditor does not have any re'uirement to communicate #ith anyone outside o management -. 1ea+nesses in internal control previously reported to those charged #ith governance are re'uired to be communicated to those charged #ith governance a ter each subse'uent audit until the #ea+nesses are corrected
)%. 1hich o the ollo#ing statements is correct concerning an auditor*s re'uired communication #ith those charged #ith governance2 A. This communication is re'uired to occur be ore the auditor*s report on the inancial statements is issued 3. This communication should include management changes in the application o signi icant accounting policies C. Any signi icant matter communicated to those charged #ith governance also should be communicated to management -. 7igni icant 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 representations2 A. :anagement*s cost-bene it (usti ications or not correcting internal control #ea+nesses 3. :anagement*s +no#ledge o uture plans that may a ect the price o the entity*s stoc+ C. :anagement*s compliance #ith contractual agreements that may a ect the inancial statements -. :anagement*s ac+no#ledgment o its responsibility or employees* violations o la#s
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)7. Eey Co. plans to present comparative inancial statements or the years ended -ecember !10 2//, and 2//.0 respectively. 7mith0 C4A0 audited Eey*s inancial statements or both years and plans to report on the comparative inancial statements on :ay 10 2/1/. Eey*s current management team #as not present until 6anuary 10 2//.. 1hat period o time should be covered by Eey*s management representation letter2 A. 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/
),. A ter 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 a ect the client*s ability to continue as a going concern C. A material raud is initiated by an employee a ter the report is issued -. Evidence o signi icant0 non-arms-length0 related party transactions that happened prior to year-end is discovered
).. A ter 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 statements covered by that report unless A. =e# in ormation comes to the auditor*s attention concerning an event that occurred prior to the date o the auditor*s report that may have a ected the auditor*s report 3. :aterial adverse events occur a ter the date o the auditor*s report C. Final determination or resolution #as made on matters that had resulted in a 'uali ication 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/. A ter 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 unless A. A inal resolution o a contingency that had resulted in a 'uali ication o the auditor*s report is made 3. A development occurs that may a ect the client*s ability to continue as a going concern C. An investigation o the auditor*s practice by a peer revie# committee ensues -. =e# in ormation is discovered concerning undisclosed related party transactions o the previously audited period
71. 1ho generally signs the legal letter2 A. 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. 1hat in ormation about the la#suit #ould you as an auditor need to +no# to decide #hether to disclose the litigation in the inancial statements2
7!. -e ine the term 9contingent liability9 and discuss the criteria used to classi y 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 7EC o icials 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 committees d. "e'uest a representation letter rom all the client*s employees e. "ead the legal brie s 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%. 1hile auditing other business processes0 an auditor may identi y in ormation about contingent liabilities. 1hat speci ic audit procedures relating to other business processes could uncover these liabilities2
7). 1hat in ormation is typically re'uested in a legal letter to a client*s attorney2
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77. 1hat is an unasserted claim and #hy #ould an attorney andBor client be reluctant to disclose an unasserted claim in the inancial statements2
7,. 1hat is the di erence bet#een contingent liabilities and commitments2
7.. &denti y the t#o primary types o subse'uent events that re'uire consideration by management 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. 1hat must auditors o public companies report to those charged #ith governance2
,2. 7tate 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+holders on :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 entire uninsured 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 o 4ump+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 in ringement action that allegedly too+ place in early 1.... &n the opinion o 4ump+in*s attorneys0 there is a reasonable ;but not probable< danger o a signi icant loss to 4ump+in. 7< >n February 1.0 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. Possi le Actions: a. Ad(ust the -ecember !10 2//. inancial statements. b. -isclose the in ormation 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 !10 2//. inancial statements. e. =o action is re'uired.
17-22
Chapter 17 Completing the Audit Engagement Ans#er Eey
True / False Questions
1. Every contingent liability must be recorded. FA!SE
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: )
2. An example o a contingent liability is an income tax dispute. T"#E
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: )
!. "eading contracts and loan agreements is one #ay to identi y unrecorded contingent liabilities. T"#E
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: +
17-2!
$. A legal letter #ill include and evaluate all contingent liabilities o the company. FA!SE
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: ,
%. Type && subse'uent events are conditions that re'uire an ad(ustment to the account balance sho#n on the inancial statements. FA!SE
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: -
). An example o a Type & event or condition is the settlement o a la#suit a ter the balance sheet date or an amount di erent rom the amount recorded in the year-end inancial statements. T"#E
17-2$
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 a ter the balance sheet date. FA!SE
,. -ual dating is used to identi y unrecorded contingent liabilities. FA!SE
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: .
.. The auditor must per orm inal analytical procedures be ore deciding on the appropriate audit report to issue or the entity. T"#E
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: /
17-2%
1/. & there is substantial doubt about the entity*s ability to continue as a going concern0 the auditor should obtain in ormation about management*s plans to mitigate the problem and assess the li+elihood that such plans can be implemented. T"#E
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: 0
Multiple Choice Questions
11. 1hen auditing contingent liabilities0 #hich o the ollo#ing procedures #ould be least e ective2 A. "eading the minutes o the board o directors 3. "evie#ing the ban+ con irmation letter C$ Examining customer con irmation replies -. Examining invoices or pro essional services
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: +
12. 1hen obtaining evidence regarding litigation against a client0 the C4A #ould be least interested in determining A$ 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 un avorable outcome -. An estimate o the potential loss
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: + $earning %&'ecti(e: ,
17-2)
1!. The auditor*s primary means o obtaining corroboration o management*s in ormation 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. Con irmation o claims and assessments rom the other parties to the litigation -. Con irmation o claims and assessments rom an o icer o the court presiding over the litigation
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: + $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 the A. 4eriod in #hich the underlying cause or legal action occurred 3. 4robability o an un avorable outcome C$ 6urisdiction in #hich the matter #ill be resolved -. Existence o a situation indicating an uncertainty as to the possible loss
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: + $earning %&'ecti(e: ,
1%. An auditor #ill ordinarily examine invoices rom la#yers primarily in order to A. 7ubstantiate accruals 3. Assess the legal rami ications o litigation in progress C. Estimate the dollar amount o contingent liabilities %$ &denti y possible unasserted litigation0 claims0 and assessments
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Com*rehension Di!!icult": #as" $earning %&'ecti(e: + $earning %&'ecti(e: ,
17-27
1). & a la#yer re uses to urnish corroborating in ormation regarding litigation0 claims0 and assessments0 the auditor should A. 8onor the con identiality o the client-la#yer relationship &$ Consider the re usal to be a scope limitation C. 7ee+ to obtain the corroborating in ormation rom management -. -isclose this act in a ootnote to the inancial statements
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: ,
17. The re usal o a client*s attorney to provide a representation on the legality o a particular act committed by the client is generally A. 7u icient reason to issue a 9sub(ect to9 'uali ied opinion &$ Considered to be a scope limitation C. &nsu icient reason to modi y the auditor*s report because o the attorney*s obligation o con identiality -. 4roper grounds to #ithdra# rom the engagement #ithout urther consideration
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: ,
1,. 1hich o the ollo#ing material events occurring subse'uent to the balance sheet date #ould re'uire an ad(ustment to the inancial statements be ore they could be issued2 A. 7ale 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 %$ 7ettlement o litigation0 in excess o the previously recorded liability
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: -
17-2,
1.. 1hich o the ollo#ing situations #ould re'uire ad(ustment to or disclosure in the inancial statements2 A. 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 i agreement is success ul %$ The ban+ruptcy o a customer #ho regularly purchased !/ percent o the company*s output
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: -
2/. An example o a Type 1 subse'uent event is A. A tornado that destroys a client*s actory a ter the balance sheet date &$ An event a ter the balance sheet date that con irms 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 obsolete C. =oti ication o an &"7 audit a ter the balance sheet date -. The client*s 3oard o -irectors unexpectedly resigns a ter the balance sheet date
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Com*rehension Di!!icult": #as" $earning %&'ecti(e: -
17-2.
21. An auditor issued an audit report that #as dual dated or a subse'uent event that occurred a ter the completion o ield #or+ but be ore issuance o the auditor*s report. The auditor*s responsibility or events occurring subse'uent to the completion o ield #or+ #as A$ 5imited to the speci ic event re erenced 3. 5imited to include only events occurring be ore the date o the last subse'uent event re erenced C. 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+
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Com*rehension Di!!icult": #as" $earning %&'ecti(e: .
22. 1hich o the ollo#ing procedures should an auditor generally per orm regarding subse'uent events2 A$ Compare the latest available interim inancial statements issued a ter year-end #ith the inancial statements being audited 3. 7end second re'uests to the client*s customers #ho ailed to respond to initial accounts receivable con irmation re'uests C. Communicate material #ea+nesses in internal controls to those charged #ith governance -. "evie# the cuto ban+ statements or several months a ter year-end
AACSB: Anal"tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: 2
17-!/
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 AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Anal"sis Di!!icult": #as" $earning %&'ecti(e: /
2$. 1hich o the ollo#ing auditing procedures is ordinarily per ormed last2 A. Con irming accounts payable 3. Testing the purchasing unction C. "eading the minutes o directors* meetings %$ >btaining a management representation letter
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: )3 $earning %&'ecti(e: /
2%. The date o the management representation letter should coincide #ith the A. -ate o the latest subse'uent event re erred to in the notes to the inancial statements 3. 3alance sheet date C$ -ate o the auditor*s report -. -ate o the engagement agreement
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: /
17-!1
2). 1hich o the ollo#ing items should an auditor communicate to those charged #ith governance in a publicly-held entity2 A$ 7igni icant audit ad(ustments recorded by the entity and management*s consultation #ith other accountants about signi icant accounting matters 3. 7igni icant audit ad(ustments recorded by the entity but not management*s consultation #ith other accountants about signi icant accounting matters C. :anagement*s consultation #ith other accountants about signi icant accounting matters but not signi icant audit ad(ustments recorded by the entity -. =either signi icant audit ad(ustments recorded by the entity nor management*s consultation #ith other accountants about signi icant accounting matters
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: )3
27. The management letter is used A. To allo# management to corroborate oral representations to the auditor 3. To con irm the terms o the audit engagement C. To list all reportable conditions #ith respect to internal controls %$ To ma+e recommendations to the client based on observations made during the audit
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: )3
17-!2
2,. A(ax0 &nc. is an a iliate o the audit client and is audited by another audit irm. 1hich o the ollo#ing is most li+ely to be used by the auditor to obtain assurance that all guarantees by the client o the a iliate*s indebtedness have been detected2 A. 7end the standard ban+ con irmation re'uest to all the client*s lender ban+s &$ "evie# client minutes and obtain a representation letter C. Examine supporting documents or all entries in intercompany accounts -. >btain #ritten con irmation o indebtedness rom the auditor o the a iliate
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: +
2.. ?enerally0 loss contingencies that are (udged to be remote@ A. 7hould be disclosed in the ootnotes 3. 7hould be recorded in the inancial statements C$ 7hould not be disclosed in the ootnotes -. 7hould be recorded in the inancial statements and the ootnotes
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: )
17-!!
!/. 1hich o the ollo#ing procedures #ould an auditor most li+ely per orm to obtain evidence about an entity*s subse'uent events2 A. "econcile ban+ activity or the month a ter the balance sheet date #ith cash activity re lected in the accounting records &$ >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 a ter the inventory date
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: + $earning %&'ecti(e: ,
!1. 1hich o the ollo#ing procedures #ould an auditor ordinarily per orm during the revie# o subse'uent events2 A. An analysis o related party transactions or the discovery o possible irregularities 3. A revie# o the cut-o ban+ statements or the period a ter 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 to the client
AACSB: Anal"tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: + $earning %&'ecti(e: -
17-!$
!2. 1hich o the ollo#ing is not an audit procedure that the independent auditor #ould per orm #ith respect to litigation0 claims and assessments2 A. &n'uire o and discuss #ith management the policies and procedures adopted or identi ying0 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 the la#yer has advised are li+ely to be asserted and must be disclosed %$ Con irm directly #ith the client*s la#yer that all claims have been recorded in the inancial statements
AACSB: Anal"tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: + $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 to A. 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
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: + $earning %&'ecti(e: ,
17-!%
!$. 1hich o the ollo#ing is generally re'uested in a legal letter2 A$ A re'uest that the attorney comment on unasserted claims #here his or her vie#s di er rom management*s evaluation 3. A list o all attorneys that per ormed 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
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: ,
!%. 1hich o the ollo#ing subse'uent events #ill be least li+ely to result in an ad(ustment to the inancial statements2 A. Culmination o events a ecting the realiAation o accounts receivable o#ned as o the balance sheet date 3. Culmination o events a ecting the realiAation o inventories o#ned as o the balance sheet date C. :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 the balance sheet date
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: -
17-!)
!). 7ubse'uent events or #hich the auditor has a responsibility to actively search are de ined 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 re lected in the inancial statements
AACSB: Communications AICPA BB: $egal AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: -
!7. An auditor is concerned #ith completing various phases o the examination a ter the balance 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
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: -
17-!7
!,. A ma(or customer o an audit client su ers a ire a ter year end0 but (ust prior to completion o audit ield #or+. The audit client believes that this event could have a signi icant direct e ect 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. 1ithhold submission o the auditor*s report until the extent o the direct e ect on the inancial statements is +no#n -. Advise management to ad(ust the inancial statements
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: -
!.. & 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 speci ic subse'uent event re erred to in =ote 6 through :arch !0 2/1/ -. >nly the speci ic subse'uent event re erred to in =ote 6 as o :arch !0 2/1/
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: .
17-!,
$/. 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 con ormity #ith generally accepted accounting principles. 1hich one o the ollo#ing procedures #ould be least appropriate or this purpose2 A$ Con irm0 as o the completion o ield #or+0 accounts receivable that have increased signi icantly rom the year-end date 3. "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+
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: 2
$1. A Type && subse'uent event usually re'uires@ A. An 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 AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: -
17-!.
$2. A ter ield #or+ audit procedures are completed0 a partner o the C4A irm #ho has not been involved in the audit per orms 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 consistency 3. &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
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1isk Anal"sis Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: /
$!. &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 di erences or #hich the auditor did not propose ad(ustments #hen they #ere discovered. 1hat is the primary purpose o this schedule2 A. To point out to the responsible client o icials the errors made by various company personnel 3. To summariAe the ad(ustments that must be made be ore the company can prepare and submit its ederal tax return C$ To identi y the potential inancial statement e ects o errors or disputed items that #ere considered immaterial #hen discovered -. To summariAe the errors made by the company so that corrections can be made a ter the audited inancial statements are released
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: /
17-$/
$$. 1hich o the ollo#ing ratios is least li+ely to assist the auditor in determining #hether the client is experiencing inancial di iculties2 A. =et #orthBtotal liabilities &$ CashBtotal assets C. Total liabilitiesBtotal assets -. =et income be ore taxesBnet sales
AACSB: Anal"tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: 0
$%. As part o an audit0 a C4A o ten re'uests a representation letter rom the client. 1hich one o the ollo#ing is not a valid purpose o such a letter2 A. To provide audit evidence 3. To emphasiAe to the client their responsibility or the airness o the inancial statements C$ To satis y himsel or hersel that a certain account balance is airly stated #hen certain customary auditing procedures are not per ormed -. 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
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: /
17-$1
$). 1hich o the ollo#ing expressions is least li+ely to be included in a client*s representation letter2 A. =o events have occurred subse'uent to the balance sheet date that re'uire ad(ustment to or disclosure in0 the inancial statements 3. The company has complied #ith all aspects o contractual agreements that #ould have a material e ect on the inancial statements in the event o noncompliance C$ :anagement ac+no#ledges responsibility or illegal actions committed by its employees -. :anagement has made available all inancial statements and related data
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Com*rehension Di!!icult": Mo erate $earning %&'ecti(e: /
$7. 9There are no violations or possible violations o la#s or regulations #hose e ects should be considered or disclosure in the inancial statements or as a basis or recording a loss contingency.9 The oregoing passage most li+ely is rom a;an< A. Client engagement letter 3. "eport on compliance #ith la#s and regulations C$ :anagement representation letter -. Attestation report on internal controls
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: /
17-$2
$,. 1hich o the ollo#ing matters is an auditor re'uired to communicate to those charged #ith governance2 A. The basis or assessing control ris+ belo# the maximum &$ The process used by management in ormulating sensitive accounting estimates C. The auditor*s preliminary (udgments about materiality levels -. The (usti ication or per orming substantive procedures at interim dates
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: )3
$.. 9There have been no communications rom regulatory agencies concerning noncompliance #ith or de iciencies in0 inancial reporting practices that could have a material e ect on the inancial statements.9 The oregoing passage is most li+ely rom a A. "eport on internal control 3. 7pecial report C$ :anagement representation letter -. 5etter or under#riters
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: /
%/. 1hen considering the use o management*s #ritten representations as audit evidence about the completeness assertion0 an auditor should understand that such representations A$ Complement0 but do not replace0 substantive procedures designed to support the assertion 3. Constitute su icient evidence to support the assertion #hen considered in combination #ith reliance on internal controls C. Are not part o the evidential matter considered to support the assertion -. "eplace reliance on internal controls as evidence to support the assertion
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: /
17-$!
%1. A #ritten representation rom a client*s management that0 among other matters0 ac+no#ledges responsibility or the air presentation o inancial statements should normally be signed by the A$ Chie executive o icer and the chie inancial o icer 3. Chie inancial o icer and the chairman o the board o directors C. Chairman o the audit committee o the board o directors -. Chie executive o icer0 the chairman o the board o directors and the client*s la#yer
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: /
%2. Communications bet#een the auditor and those charged #ith governance should include all o the ollo#ing except A$ A summary o speci ic audit procedures used 3. 7igni icant audit ad(ustments C. Consultations #ith other accountants -. :a(or issues discussed #ith management be ore the auditor #as retained
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: )3
17-$$
%!. 1hich o the ollo#ing events occurring a ter the issuance o a client*s inancial statements and the auditor*s report most li+ely #ould cause the auditor to ma+e urther in'uiries about the previously issued inancial statements2 A. An uninsured natural disaster occurs that may a ect the entity*s ability to continue as a going concern 3. A contingency is resolved that had been disclosed in the audited inancial statements C$ =e# in ormation is discovered concerning undisclosed lease transactions in the audited period -. A subsidiary that accounts or 2%C o the entity*s consolidated net income is sold
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": Mo erate $earning %&'ecti(e: ))
%$. >n February 2%0 a C4A issued an auditor*s report expressing an un'uali ied opinion on inancial statements or the year ended 6anuary !1. >n :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 re used to ad(ust the inancial statements or this subse'uent event. The C4A determined that the in ormation is reliable and that there are creditors currently relying on the inancial statements. The C4A*s next course o action most li+ely #ould be to A. =oti y the entity*s creditors that the inancial statements and the related auditor*s report should no longer be relied upon &$ =oti y each member o the entity*s board o directors about management*s re usal to ad(ust the 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
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Anal"sis Di!!icult": 4ar $earning %&'ecti(e: ))
17-$%
%%. A ter an audit report containing an un'uali ied opinion on a nonpublic client*s inancial statements is issued0 the auditor learns that the client has decided to sell the shares o a subsidiary that accounts or !/ percent o its revenue and 2% percent o its net income. The auditor should A. -etermine #hether the in ormation is reliable and0 i it is determined to be reliable0 re'uest that revised inancial statements be issued 3. =oti y the entity that the auditor*s report may no longer be associated #ith the inancial statements C. -escribe the e ects o this subse'uently discovered in ormation in communications #ith persons +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
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: Anal"sis Di!!icult": Mo erate $earning %&'ecti(e: ))
%). An auditor*s client has violated a minor re'uirement o its bond indenture #hich could result in the trustee re'uiring immediate payment o the principal amount due. The client re uses to see+ a #aiver rom the bond trustee. "e'uest or immediate payment is not considered li+ely. Dnder these circumstances the auditor must A. "e'uire classi ication o bonds payable as a current liability 3. Contact the bond trustee directly C$ -isclose the situation in the auditor*s report -. >btain an opinion rom the company*s attorney as to the li+elihood o the trustee*s en orcement o the re'uirement
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: + $earning %&'ecti(e: ,
17-$)
%7. Auditors o ten 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 loss 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. &n ormation concerning the progress o cases to date %$ Corroborative in'uiries made o the client by the auditor
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": 4ar $earning %&'ecti(e: ,
%,. The primary reason an auditor re'uests letters o in'uiry be sent to a client*s attorneys is to provide the auditor #ith A. A description and evaluation o litigation0 claims0 and assessments that existed at the date o the balance sheet 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. The opportunity to examine the documentation concerning litigation0 claims0 and assessments %$ Corroboration o the in ormation urnished by management concerning litigation0 claims0 and assessments
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": 4ar $earning %&'ecti(e: ,
17-$7
%.. 1hich o the ollo#ing statements extracted rom a client*s la#yer*s letter concerning litigation0 claims0 and assessments most li+ely #ould cause the auditor to re'uest clari ication2 A. 9& believe that the possible liability to the company is nominal in amount.9 &$ 9& believe that the action can be settled or less than the damages claimed.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 de end this action success ully.9
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: Decision Making Bloom's: Anal"sis Di!!icult": 4ar $earning %&'ecti(e: ,
)/. An auditor*s decision concerning #hether or not to 9dual date9 the audit report is based upon the auditor*s #illingness to A$ 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 the auditor*s report -. Assume responsibility or events subse'uent to the issuance o the auditor*s report
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: .
)1. A Type & subse'uent event usually re'uires@ A$ An ad(ustment to the inancial statements 3. =o ad(ustment to the inancial statements C. 1ithdra#al rom the engagement -. =one o the above
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: -
17-$,
)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 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 be reasonably estimated. -. The outcome is un+no#n and the loss is reasonably estimable but the client does not #ant to boo+ the loss.
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: )
)!. 1hich o the ollo#ing statements ordinarily is included among the #ritten client representations obtained by the auditor2 A$ Compensating balances and other arrangements involving restrictions on cash balances have been disclosed 3. :anagement ac+no#ledges responsibility or illegal actions committed by employees C. 7u icient evidential matter has been made available to permit the issuance o an un'uali ied opinion -. :anagement ac+no#ledges that there are no material #ea+nesses in the account balances
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": 4ar $earning %&'ecti(e: /
17-$.
)$. 1hich o the ollo#ing statements is correct about an auditor*s re'uired communication #ith management and those charged #ith governance2 A. Any matters communicated to those charged #ith governance are also re'uired to be communicated to the entity*s management &$ The auditor is re'uired to in orm those charged #ith governance about signi icant errors discovered by the auditor and subse'uently corrected by management C. The auditor does not have any re'uirement to communicate #ith anyone outside o management -. 1ea+nesses in internal control previously reported to those charged #ith governance are re'uired to be communicated to those charged #ith governance a ter each subse'uent audit until the #ea+nesses are corrected
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": 4ar $earning %&'ecti(e: )3
)%. 1hich o the ollo#ing statements is correct concerning an auditor*s re'uired communication #ith those charged #ith governance2 A. This communication is re'uired to occur be ore the auditor*s report on the inancial statements is issued &$ This communication should include management changes in the application o signi icant accounting policies C. Any signi icant matter communicated to those charged #ith governance also should be communicated to management -. 7igni icant audit ad(ustments proposed by the auditor and recorded by management need not be communicated to those charged #ith governance
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: )3
17-%/
)). For #hich o the ollo#ing matters should an auditor obtain #ritten management representations2 A. :anagement*s cost-bene it (usti ications or not correcting internal control #ea+nesses 3. :anagement*s +no#ledge o uture plans that may a ect the price o the entity*s stoc+ C$ :anagement*s compliance #ith contractual agreements that may a ect the inancial statements -. :anagement*s ac+no#ledgment o its responsibility or employees* violations o la#s
AACSB: Communications AICPA BB: In ustr" AICPA FN: Decision Making Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: /
)7. Eey Co. plans to present comparative inancial statements or the years ended -ecember !10 2//, and 2//.0 respectively. 7mith0 C4A0 audited Eey*s inancial statements or both years and plans to report on the comparative inancial statements on :ay 10 2/1/. Eey*s current management team #as not present until 6anuary 10 2//.. 1hat period o time should be covered by Eey*s management representation letter2 A. 6anuary 10 2//, through -ecember !10 2//. &$ 6anuary 10 2//, through :ay 10 2/1/ C. 6anuary 10 2//. through -ecember !10 2//. -. 6anuary 10 2//. through :ay 10 2/1/
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: 2
17-%1
),. A ter issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther in'uiries #ith respect to audited inancial statements covered by an auditor*s report unless A. A la#suit in #hich ris+ o loss #as considered remote is resolved in the company*s avor 3. A development occurs #hich may a ect the client*s ability to continue as a going concern C. A material raud is initiated by an employee a ter the report is issued %$ Evidence o signi icant0 non-arms-length0 related party transactions that happened prior to year-end is discovered
AACSB: Communications AICPA BB: $egal AICPA FN: Measurement Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: ))
).. A ter an auditor has issued an audit report on a nonpublic entity0 there is no obligation to ma+e any urther audit tests or in'uiries #ith respect to the audited inancial statements covered by that report unless A$ =e# in ormation comes to the auditor*s attention concerning an event that occurred prior to the date o the auditor*s report that may have a ected the auditor*s report 3. :aterial adverse events occur a ter the date o the auditor*s report C. Final determination or resolution #as made on matters that had resulted in a 'uali ication 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
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: ))
17-%2
7/. A ter issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther in'uiries #ith respect to audited inancial statements covered by that report unless A. A inal resolution o a contingency that had resulted in a 'uali ication o the auditor*s report is made 3. A development occurs that may a ect the client*s ability to continue as a going concern C. An investigation o the auditor*s practice by a peer revie# committee ensues %$ =e# in ormation is discovered concerning undisclosed related party transactions o the previously audited period
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: ))
71. 1ho generally signs the legal letter2 A. The board o directors 3. The audit partner C$ The CE> o the entity being audited -. The entity*s attorneys
AACSB: Anal"tic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: ,
Short Answer Questions
17-%!
72. A discrimination la#suit is pending or your client0 4retty 4eople &ncorporated. 1hat in ormation about the la#suit #ould you as an auditor need to +no# to decide #hether to disclose the litigation in the inancial statements2 & a negative outcome o the la#suit is probable and the amount o the contingency can be estimated0 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 negative outcome 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.
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": #as" $earning %&'ecti(e: )
17-%$
7!. -e ine the term 9contingent liability9 and discuss the criteria used to classi y these events or conditions. 4rovide some example o contingent liabilities. A contingent liability is de ined as an existing condition0 situation0 or set o circumstances involving uncertainty as the possible loss to an entity that #ill ultimately be resolved #hen some uture event occurs or ails to occur. FA73 A7C Topic $%/0 9Contingencies09 states that #hen a contingent liability exists0 the li+elihood that the uture event #ill result in a loss or impairment o an asset or the incurrence o a liability can be classi ied 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 less than li+ely. 1hen 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 possible claims and assessments0 income tax disputes0 product #arranties or de ects0 guarantees o obligations to others0 and agreements to repurchase receivables that have been sold.
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: )
17-%%
7$. From the list belo#0 select the procedures that an auditor #ould use to test or contingent liabilities. a. &n'uire o 7EC o icials 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 committees d. "e'uest a representation letter rom all the client*s employees e. "ead the legal brie s 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.
7%. 1hile auditing other business processes0 an auditor may identi y in ormation about contingent liabilities. 1hat speci ic audit procedures relating to other business processes could uncover these liabilities2 "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 &"7 agents* reports Con irming or other#ise documenting guarantees and letters o credit obtained rom inancial institutions or other lending agencies &nspecting other documents or possible guarantees
17-%)
7). 1hat in ormation is typically re'uested in a legal letter to a client*s attorney2 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 o assertion and reasonably possible o un avorable 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 di er rom management*s evaluation
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: ,
77. 1hat is an unasserted claim and #hy #ould an attorney andBor client be reluctant to disclose an unasserted claim in the inancial statements2 An unasserted claim is one in #hich the in(ured party or potential claimant has not yet noti ied the entity o a possible claim. The attorney may be reluctant to provide in ormation on such claims due to client-attorney privilege. Also0 both the client and the attorney may be concerned that disclosing the unasserted claims could lead to the claims actually occurring.
AACSB: Communications AICPA BB: In ustr" AICPA FN: 1e*orting Bloom's: Com*rehension Di!!icult": #as" $earning %&'ecti(e: ,
17-%7
7,. 1hat is the di erence bet#een contingent liabilities and commitments2 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. The conditions in a commitment are speci ied in advance.
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: ) $earning %&'ecti(e: 5
7.. &denti y the t#o primary types o subse'uent events that re'uire consideration by management 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 a ect the estimates that are part o the inancial statement preparation process ;Type & events<. Examples include declaration o ban+ruptcy by a customer #ith an outstanding accounts receivable balance ;the deterioration existed at the balance sheet date< and the settlement o litigation at an amount di erent rom the amount already recorded on the boo+s. Events that provide evidence about conditions that did not exist at the date o the balance sheet but arose subse'uent to that date ;Type && events<. Examples include a decline in the mar+et value o securities held or temporary investment or resale during the subse'uent period and loss due to natural disaster a ter the balance sheet date.
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: -
,/. -iscuss the steps used by an auditor to evaluate an entity*s ability to continue as a going concern.
17-%,
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 a reasonable period o time ;de ined as one year beyond the date o the inancial statements being audited<. The auditor should ollo# three overall steps in ma+ing the going-concern evaluation@ 7tep 1. Consider #hether the results o audit procedures per ormed during the planning0 per ormance0 and completion o the audit indicate #hether there is substantial doubt about the entity*s ability to continue as a going concern or a reasonable period o time ;one year<. 7tep 2. & there is substantial doubt0 the auditor should obtain in ormation about management*s plan to mitigate the going concern problem and assess the li+elihood that such plans can be implemented. 7tep !. & the auditor concludes0 a ter evaluating management*s plans0 that there is substantial doubt about the ability o the entity to continue as a going concern0 he or she should consider the ade'uacy o the disclosures about the entity*s ability to continue and include an explanatory paragraph in the audit report. Auditing standards identi y our ma(or categories o conditions or events@ negative inancial trends0 other inancial di iculties0 internal problem0 and external matters.
AACSB: Communications AICPA BB: In ustr" AICPA FN: Measurement Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: 0
,1. -iscuss the internal control communication re'uirements o the 4CA>3. 1hat must auditors o public companies report to those charged #ith governance2 The items to be communicated are organiAed into three categories@ the auditor*s responsibilities under generally accepted auditing standards0 an overvie# o the planned scope and timing o the audit0 and signi icant indings rom the audit. ;7ee Table 17-$ or speci ic details o items to be communicated.<
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": Mo erate $earning %&'ecti(e: )3
17-%.
,2. 7tate 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 the auditor*s in'uiries
AACSB: Communications AICPA BB: Critical Thinking AICPA FN: 1e*orting Bloom's: Knowle ge Di!!icult": #as" $earning %&'ecti(e: /
,!. 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+holders on :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 entire uninsured 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 o 4ump+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 in ringement action that allegedly too+ place in early 1.... &n the opinion o 4ump+in*s attorneys0 there is a reasonable ;but not probable< danger o a signi icant loss to 4ump+in. 7< >n February 1.0 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-)/
Possi le Actions: a. Ad(ust the -ecember !10 2//. inancial statements. b. -isclose the in ormation 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 !10 2//. inancial statements. e. =o action is re'uired. 1. dF 2. bF !. aF $. eF %. cF ). bF 7. a
AACSB: Communications AICPA BB: $egal AICPA FN: 1e*orting Bloom's: A**lication Di!!icult": 4ar $earning %&'ecti(e: )) $earning %&'ecti(e: -
17-)1

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Chapter 17 - Completing the Audit Engagement

Chapter 17 Completing the Audit Engagement

1. Every contingent liability must be recorded. True False

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

Chapter 17 - Completing the Audit Engagement

,. -ual dating is used to identi y unrecorded contingent liabilities. True False

Multiple Choice Questions

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Short Answer Questions

Chapter 17 - Completing the Audit Engagement

7). 1hat in ormation is typically re'uested in a legal letter to a client*s attorney2

Chapter 17 - Completing the Audit Engagement

7,. 1hat is the di erence bet#een contingent liabilities and commitments2

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 Completing the Audit Engagement Ans#er Eey

True / False Questions

1. Every contingent liability must be recorded. FA!SE

2. An example o a contingent liability is an income tax dispute. T"#E

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

,. -ual dating is used to identi y unrecorded contingent liabilities. FA!SE

Chapter 17 - Completing the Audit Engagement

Multiple Choice Questions

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Chapter 17 - Completing the Audit Engagement

Auditing & Accounting Chapter 17 TB

Auditing & Accounting Chapter 17 TB