A 16-19

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

• Sale of long-term debt or capital stock.

• Loss of a plant as a result of a flood.

• Major purchase of a business that is expected to double sales volume.

• Settlement of litigation, in excess of the previously recorded liability.

Which of the following situations would require adjustment to or disclosure in the financial statements?

• A merger discussion.

• The application for a patent on a new production process.

• Discussions with a customer that could lead to a 40 percent increase in the entity's sales if agreement is successful.

• The bankruptcy of a customer who regularly purchased 30 percent of the company's output.

An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was:

• limited to the specific event referenced.

• limited to include only events occurring before the date of the last subsequent event referenced.

• extended to subsequent events occurring through the date of issuance of the report.

• extended to include all events occurring since the completion of fieldwork.

Generally, loss contingencies that are judged to be remote:

• should be disclosed in the footnotes.

• should be recorded in the financial statements.

• should not be disclosed in the footnotes.

• should be recorded in the financial statements and the footnotes.

A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when:

• the outcome of the event is judged to be probable and the loss can be reasonably estimated.

• the loss can be reasonably estimated, but the outcome is unknown.

• the outcome of the event is judged to be reasonably possible, but the loss cannot be reasonably estimated.

• the outcome is unknown and the loss is reasonably estimable but the entity does not want to book the loss.

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the:

• possibility of purchasing certain assets rather than leasing them.

• capability of extending the due dates of existing debt.

• appropriateness of changing depreciation methods from double declining balance to straight line.

• marketability of property and equipment that management plans to keep.

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

• Inspecting title documents to verify whether any assets are pledged as collateral.

• Confirming with third parties the details of arrangements to maintain financial support.

• Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.

• Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

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

• Cash flows from operating activities are negative.

• Research and development projects are postponed.

• Significant related party transactions are pervasive.

• Stock dividends replace annual cash dividends.

Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the:

• balance sheet date

• date of the auditor's report

• subsequent to balance sheet date but prior to the issuance of the financial statements.

• date of the auditor's report and concern contingencies that are not reflected in the financial statements.

A major customer of an entity suffers a fire after year-end, but just prior to completion of audit fieldwork. The entity believes that this event could have a significant direct effect on the financial statements. The auditor should:

• disclose the event in the auditor's report.

• advise management to disclose the event in the notes to the financial statements.

• withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known.

• advise management to adjust the financial statements.