When auditing contingent liabilities, which of the following procedures would be least effective?

C) Examining customer confirmation replies

A) Reading the minutes of the board of directors.

D) Examining invoices for legal services.

When obtaining evidence regarding litigation against an entity, the CPA would be least interested in determining:

A) an estimate of when the matter will be resolved.

B) the period in which the underlying cause of the litigation occurred.

C) the probability of an unfavorable outcome.

D) an estimate of the potential loss.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:

A) letter of audit inquiry to the entity's lawyer

B) letter of corroboration from the auditor's lawyer upon review of the legal documentation.

C) confirmation of claims and assessments from the other parties to the litigation

D) confirmation of claims and assessments from an officer of the court presiding over the litigation

An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against an entity except the:

C) jurisdiction in which the matter will be resolved.

A) period in which the underlying cause for legal action occurred.

B) probability of an unfavorable outcome.

D) existence of a situation indicating an uncertainty as to the possible loss.

An auditor will ordinarily examine invoices from lawyers primarily in order to:

D) identify actual or potential litigation against the entity.

B) assess the legal ramifications of litigation in progress.

C) estimate the dollar amount of contingent liabilities.

If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should:

B) consider the refusal to be a scope limitation

A) honor the confidentiality of the client-lawyer relationship.

C) seek to obtain the corroborating information from management.

D) disclose this fact in a footnote to the financial statements.

The refusal of an entity's attorney to provide a representation on the legality of a particular act committed by the entity is generally:

B) considered to be a scope limitation.

A) sufficient reason to issue a "subject to" qualified opinion.

C) insufficient reason to modify the auditor's report because of the attorney's obligation of confidentiality.

D) proper grounds to withdraw from the engagement without further consideration.

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?

D) Settlement of litigation, in excess of the previously recorded liability.

A) Sale of long-term debt or capital stock.

B) Loss of a plant as a result of a flood.

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

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

D) The bankruptcy of a customer who regularly purchased 30 percent of the company's output

B) The application for a patent on a new production process

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

An example of a Type I subsequent event is:

B) an event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the entity's fiscal year) that a large portion of the entity's inventory is obsolete.

A) a tornado that destroys an entity's factory after the balance sheet date

C) notification of an IRS audit after the balance sheet date.

D) the entity's Board of Directors unexpectedly resigns after the balance sheet date.

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:

A) limited to the specific event referenced.

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

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

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

Which of the following procedures should an auditor generally perform regarding subsequent events?

A) Compare the latest available interim financial statements issued after year-end with the financial statements being audited.

B) Send second requests to the entity's customers who failed to respond to initial accounts receivable confirmation requests

C) Communicate material weaknesses in internal controls to those charged with governance.

D) Review the cutoff bank statements for several months after year-end.

The purpose of analytical procedures at the completion of the audit includes all of the following except:

B) assessing the conclusions reached on the financials statement components.

C) evaluating the overall financial statement presentation

D) recalculating some of the ratios examined during audit planning to evaluate how these ratios may have been affected by audit adjustments.

Which of the following auditing procedures is ordinarily performed last?

D) Obtaining a management representation letter.

A) Confirming accounts payable.

B) Testing the purchasing function

C) Reading the minutes of directors' meetings for evidence of authorization of acquisition of fixed assets.

The date of the management representation letter generally coincides with the:

C) date of the auditor's report

A) date of the latest subsequent event referred to in the notes to the financial statements

D) date of the engagement agreement.

Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?

A) Significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters.

B) Significant unusual transactions and critical estimates, but not management's consultation with other accountants about significant accounting matters

C) Management's consultation with other accountants about significant accounting matters but not significant unusual transactions and critical estimates

D) Neither significant unusual transactions, critical estimates, nor management's consultation with other accountants about significant accounting matters.

The management letter is used:

D) to make recommendations to the entity based on observations made during the audit.

A) to allow management to document, in writing, oral representations to the auditor

B) to confirm the terms of the audit engagement.

C) to list all reportable conditions with respect to internal controls

Generally, loss contingencies that are judged to be remote:

C) should not be disclosed in the footnotes.

A) should be disclosed in the footnotes.

B) should be recorded in the financial statements.

D) should be recorded in the financial statements and the footnotes.

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?

B) Ask legal counsel about any developments relating to litigation, claims, or assessments against the company.

A) Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records.

C) Review the treasurer's monthly reports on temporary investments owned, purchased, and sold.

D) Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

C) A reading of the available minutes of meetings of stockholders, directors, or other committees for the subsequent-events period.

A) An analysis of related party transactions for the discovery of possible irregularities.

B) A review of the cutoff bank statements for the period after the year-end.

D) An investigation of material weaknesses in internal control previously communicated to the entity.

Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation, claims, and assessments in audit procedures for subsequent events and contingent liabilities?

D) Confirm directly with the entity's lawyer that all claims have been recorded in the financial statements.

A) Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.

C) Obtain a written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed.

An attorney is responding to an independent auditor as a result of the entity's letter of inquiry. The attorney may appropriately limit the response to:

B) matters to which the attorney has given substantive attention in the form of legal consultation or representation.

A) asserted claims and litigation.

C) asserted, overtly threatened, or pending claims and litigation

D) items that have an extremely high probability of being resolved to the entity's detriment.

Which of the following is generally requested in a legal letter?

A) A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.

B) A list of all attorneys that performed any work for the entity during the year.

C) A statement indicating that the attorney is responsible for the fair presentation of unasserted claims in the entity's financial statements.

D) A request that the attorney provide a copy of all invoices given to the entity during the year.

Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?

D) Material changes in the quoted market prices of listed investment securities since the balance sheet date

A) Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date.

B) Culmination of events affecting the realization of inventories owned as of the balance sheet date.

C) Material changes in the settlement of liabilities that were estimated as of the balance sheet date.

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

B) date of the auditor's report.

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

An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the:

A) issuance of the financial statements

B) final review of the audit working papers.

D) delivery of the auditor's report to the entity

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:

A) advise management to disclose the event in the notes to the financial statements.

B) disclose the event in the auditor's report.

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

D) advise management to adjust the financial statements

If an auditor dates the auditor's report on financial statements for the year ended December 31, 2013, as of February 10, 2014, except for Note J, as to which the date is March 3, 2014, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of:

C) all subsequent events occurring through February 10, 2014 and the specific subsequent event referred to in Note J through March 3, 2014.

A) all subsequent events occurring through March 3, 2014.

B) all subsequent events occurring through February 10, 2014.

D) only the specific subsequent event referred to in Note J as of March 3, 2014.

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?

A) Confirm, as of the completion of fieldwork, accounts receivable that have increased significantly from the year-end date

B) Read the minutes of the board of directors.

C) Inquire of management concerning events that may have occurred.

D) Ask legal counsel about any developments relating to litigation, claims, or assessments against the company.

A Type II subsequent event usually requires:

C) disclosure in the footnotes.

A) an adjustment to the financial statements and the footnotes.

B) an adjustment to the financial statements but no special disclosure is required.

D) neither an adjustment to the financial statements nor disclosure in the footnotes

After fieldwork audit procedures are completed for a public company and private company whose financial statements are expected to be widely distributed, a partner of the CPA firm who has not been involved in the audit performs an engagement quality review of the working papers. This review focuses on:

A) an evaluation of the significant judgments made by the engagement teams and the conclusions reached in formulating the audit report.

B) irregularities involving the entity's management and its employees.

C) the materiality of the adjusting entries proposed by the audit staff.

D) the communication of internal control weaknesses to those charged with governance.

Which of the following ratios is least likely to assist the auditor in determining whether the entity is experiencing financial difficulties?

A) Net worth/total liabilities.

C) Total liabilities/total assets.

D) Net income before taxes/net sales.

As part of an audit, a CPA often requests a management representation letter from the entity. Which one of the following is not a valid purpose of such a letter?

C) To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed.

B) To emphasize to the entity their responsibility for the fairness of the financial statements.

D) To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts.

Which of the following expressions is least likely to be included in a management representation letter?

C) Management acknowledges responsibility for illegal actions committed by its employees.

A) No events have occurred subsequent to the balance sheet date that require adjustment to or disclosure in the financial statements.

B) The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.

D) Management has made available all financial statements and related data.

"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a(n):

C) management representation letter.

B) report on compliance with laws and regulations.

D) attestation report on internal controls.

Which of the following matters is an auditor required to communicate to those charged with governance?

B) The disagreements with management, if any

A) The basis for assessing control risk at low

C) The auditor's preliminary judgments about materiality levels

D) The justification for performing substantive procedures at interim dates.

"There have been no communications from regulatory agencies concerning noncompliance with or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:

C) management representation letter.

A written representation from an entity's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the:

A) chief executive officer and the chief financial officer.

B) chief financial officer and the chairman of the board of directors.

C) chairman of the audit committee of the board of directors.

D) chief executive officer, the chairman of the board of directors and the entity's lawyer.

Communications between the auditor and those charged with governance should include all of the following except:

A) a summary of specific audit procedures used.

B) a summary of uncorrected misstatements.

C) consultations with other accountants.

D) major issues discussed with management before the auditor was retained.

Which of the following events occurring after the issuance of an entity's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

C) New information is discovered concerning undisclosed lease transactions in the audited period.

A) An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.

B) A contingency is resolved that had been disclosed in the audited financial statements.

D) A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold.

Chapter 17

Authored by Thư anh

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University

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Every contingent liability must be recorded.

true

false

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An example of a contingent liability is an income tax dispute.

true

false

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Reading contracts and loan agreements is one way to identify unrecorded contingent liabilities.

true

false

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

A legal letter will include and evaluate all contingent liabilities of the company.

true

false

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Type II subsequent events are conditions that require an adjustment to the account balance shown on the financial statements.

true

false

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An example of a Type I event or condition is the settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year-end financial statements.

true

false

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An example of a Type II event or condition is an uncollectible account receivable resulting from deterioration in a customer's financial condition prior to year end, about which the entity is unaware. The customer declares bankruptcy after the balance sheet date but prior to the issuance of the financial statements.

true

false

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Chapter 17

Every contingent liability must be recorded.

An example of a contingent liability is an income tax dispute.

Reading contracts and loan agreements is one way to identify unrecorded contingent liabilities.

A legal letter will include and evaluate all contingent liabilities of the company.

Type II subsequent events are conditions that require an adjustment to the account balance shown on the financial statements.

An example of a Type I event or condition is the settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year-end financial statements.

Dual dating is used to identify unrecorded contingent liabilities.

The auditor must perform final analytical procedures before deciding on the appropriate audit report to issue for the entity.

If there is substantial doubt about the entity's ability to continue as a going concern, the auditor should obtain information about the management's plans to mitigate the problem and assess the likelihood that such plans can be implemented.

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