Chat with AIExam 18: Completing the Audit
Whenever subsequent events are used to evaluate the amounts included in the statements,care must be taken to distinguish between conditions that existed at the balance sheet date and those that came into being after the end of the year.The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation
(32) 
VerifiedA
CAS 250 requires the auditor to communicate illegal acts to the audit committee
(36) VerifiedD
Klein Corporation has reported a loss for the sixth year in a row.Klein also has a large bank loan due in the coming year,bringing its current ratio to 0.60.Further,due to recent economic slowdown,Klein had to increase its bad debt expense by 4% and also saw its largest client,Forest Prairie file for bankruptcy.Forest Prairie's purchases made up 18% of Klein's total sales in the past year.Forest Prairie also had an unpaid balance to Klein at year end.
To reduce expenses,Klein has reduced employee training from 5 days to 1 day.During the year,an employee was seriously injured in the production process when his arm was caught in a press.The employee has filed a lawsuit against Klein for $1 000 000 and claims that he was not properly trained to use the equipment.The legal proceeding for this case should begin in the next fiscal year.Since Klein has never been involved in such a lawsuit before,the legal counsel indicated that they were not able to estimate the amount and likelihood that Klein would have to pay.
Required:
Evaluate the going concern situation at Klein and indicate what the auditor would be required to do under CAS 570.
(36) VerifiedIt is evident that Klein has a going concern issue due to the following factors.
-The large bank loan due in the coming year is not being covered by their current assets (current ratio is less than 1).This indicates the possibility of Klein being unable to repay the bank,at which point the bank could push Klein into bankruptcy.
-Klein has incurred losses for the past 6 years,which indicates it is unable to generate cash from its operations.
-Klein is expected to have even larger losses in the following year due to poor collectability of accounts receivables and the loss of a major customer.
-Klein may have to pay up to $1 000 000 for the lawsuit by the injured employee.
-The fact that the company has reduced its efforts to train employees indicates that there may be future quality issues and/or more employee injuries which could cause more lawsuits and poor quality products/service.
In response to this evidence and to evaluate how this issue should be included in the auditor's report,the auditor should:
-inquire with management and consider the actions they intend to take to repay the bank loan and generate profits in the coming year.
-contact the bank to see if they will grant an extension or renegotiate the terms with Klein for the loan that is due in the next year.
-inquire if Klein has any other sources of financing to help them repay the debt if the bank is not willing to renegotiate the loan.
-consult external counsel or search for similar lawsuits in the industry to determine the amount and likelihood that Klein will have to pay.
The auditor will then be able to decide on the seriousness of the going concern issue and decide if an explanatory paragraph in the auditor's report is needed or if the auditor's report needs to be further modified.
If the amount of a probable loss on a contingent liability is not determinable,the liability should be
(41) Discuss three audit procedures commonly used to search for contingent liabilities.
(34) State the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit.
(35) State three types of information that should be included in a standard letter of inquiry of a client's law firms.
(41) A)Discuss the purposes of performing analytical procedures during the audit completion phase.B)State the two purposes of the client representation letter.
(35) What situation represents a contingent liability for a company?
(32) List four specific matters that should be included in a client representation letter.
(47) The following events all occurred after the balance sheet date (6/30/17)but prior to the auditor's report (9/10/17).Which one would require an adjustment to the account balances as of 6/30/17?
(34) CAS require the auditor to review the other information in the annual report to ascertain its consistency with the financial statements.If there is a material inconsistency,the client should be requested to change the information.If the client refuses,the auditor should
(42) One of the purposes of a client representation letter is to
(32) In addition to the financial statements,MD&A (management discussion and analysis)are appended to the financial statements to inform users of management's expectations for the foreseeable future,as well as to provide management's assessment of the financial results.MD&A is prepared primarily because it is
(38) The standard letter of confirmation from a client's legal counsel should ask for information about the period of time
(34) Which of the following auditing procedures is ordinarily performed last?
(37) What action will a lawyer likely take if they have information about a lawsuit that was not mentioned by the client?
(39) State the three conditions required for a contingent liability to exist.
(32) An important part of evaluating whether the financial statements are fairly stated is summarizing the misstatements uncovered in the audit.Whenever the auditor uncovers misstatements that are in themselves material,
(45) Kendra is inquiring about subsequent events with regards to lawsuits and contingent claims.To obtain a meaningful answer,Kendra should hold the enquiry with
(29) 
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