Question 1

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?

Accepted Answer

A)  controller 
B)  president 
C)  accounts receivable clerk 
D)  vice president of sales 
A)  controller 
B)  president 
C)  accounts receivable clerk 
D)  vice president of sales

Question 2

Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent

Accepted Answer

A)  the culmination of conditions that existed at the balance sheet date. 
B)  additional new information related to events that were in existence on the balance sheet date. 
C)  final estimates of losses relating to casualties occurring in the subsequent events period. 
D)  preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date. 
A)  the culmination of conditions that existed at the balance sheet date. 
B)  additional new information related to events that were in existence on the balance sheet date. 
C)  final estimates of losses relating to casualties occurring in the subsequent events period. 
D)  preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Question 3

Which of the following is not a common audit procedure used to search for contingent liabilities?

Accepted Answer

A)  examine letters of credit 
B)  examine payroll reports 
C)  review internal revenue agent reports 
D)  analyze legal expense 
A)  examine letters of credit 
B)  examine payroll reports 
C)  review internal revenue agent reports 
D)  analyze legal expense

Question 4

The issuance of bonds by the client subsequent to the balance sheet date would require a footnote disclosure in, but no adjustment to, the financial statements under audit.

Accepted Answer

A) True 
 B)False

Question 5

Contingent liability disclosure in the footnotes of the financial statements would normally be made when

Accepted Answer

A)  the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor. 
B)  a reasonable estimation of the loss can be made, but the outcome is not probable. 
C)  the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made. 
D)  the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made. 
A)  the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor. 
B)  a reasonable estimation of the loss can be made, but the outcome is not probable. 
C)  the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made. 
D)  the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made.

Question 6

A lawsuit has been filed against your client. If, in the opinion of legal counsel, the likelihood your client will lose the lawsuit is remote, no financial statement accrual or disclosure of the potential loss would generally be required.

Accepted Answer

A) True 
 B)False

Question 7

Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses.

Accepted Answer

A) True 
 B)False

Question 8

The fieldwork for the December 31, 2018 audit of Schmidt Corporation ended on March 17, 2019. The financial statements and auditor's report were issued on March 29, 2019. In each of the material situations (1 through 5) below, indicate the appropriate action (a, b, c). The possible actions are as follows
a. Adjust the December 31, 2018 financial statements.
b. Disclose the information in a footnote in the December 31, 2018 financial statements.
c. No action is required.
The situations are as follows:
________ 1. On March 1, 2019, one of Schmidt Corporation's major customers declared bankruptcy. The customer's financial condition in 2018 was deteriorating and they owed Schmidt Corporation a large sum of money as of the balance sheet date.
________ 2. On February 17, 2019, Schmidt Corporation sold some machinery for its book value.
________ 3. On February 20, 2019 a flood destroyed the entire uninsured inventory in one of Schmidt's warehouses.
________ 4. On January 5, 2019, there was a significant decline in the market value of the securities held for resale from their value as of the balance sheet date.
________ 5. On March 10, 2019, the company settled a lawsuit at an amount significantly higher than the amount recorded as a liability on the books as of the balance sheet date.

Accepted Answer

1. a
2. c

Question 9

Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements.

Accepted Answer

A)  audit 
B)  express an opinion on 
C)  read 
D)  analyze 
A)  audit 
B)  express an opinion on 
C)  read 
D)  analyze

Question 10

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements?

Accepted Answer

A)  sale of a bond or capital stock issue 
B)  loss of plant or inventories as a result of fire or flood 
C)  a significant decline in the market price of the corporation's stock 
D)  a merger or acquisition 
A)  sale of a bond or capital stock issue 
B)  loss of plant or inventories as a result of fire or flood 
C)  a significant decline in the market price of the corporation's stock 
D)  a merger or acquisition

Question 11

There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including

Accepted Answer

A)  to evaluate the performance of inexperienced personnel. 
B)  to make sure that the audit meets the CPA firm's standard of performance. 
C)  to counteract the bias that often enters into the auditor's judgment. 
D)  all of the above. 
A)  to evaluate the performance of inexperienced personnel. 
B)  to make sure that the audit meets the CPA firm's standard of performance. 
C)  to counteract the bias that often enters into the auditor's judgment. 
D)  all of the above.

Question 12

Due to the unique nature of disclosures related to contingent liabilities and subsequent events, auditors often assess the risk as high that all required information may not be completely disclosed in the footnotes.

Accepted Answer

A) True 
 B)False

Question 13

Subsequent events which require adjustment to the financial statements provide additional information about significant conditions/events which did not exist at the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 14

What are the three required conditions for a contingent liability to exist?

Accepted Answer

1. There is potential for future payment

Question 15

Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is

Accepted Answer

A)  analytical procedures. 
B)  confirmations from creditors. 
C)  statistical sampling procedures. 
D)  tests of internal controls. 
A)  analytical procedures. 
B)  confirmations from creditors. 
C)  statistical sampling procedures. 
D)  tests of internal controls.

Question 16

At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities.

Accepted Answer

A) True 
 B)False

Question 17

Attorneys in recent years have become reluctant to provide certain information to auditors because of their own exposure to legal liability for providing incorrect or confidential information. State the two main reasons that attorneys refuse to provide the auditors with complete information.

Accepted Answer

• The attorneys refuse to resp

Question 18

Attorneys must report material violations of federal securities laws to the company's audit committee.

Accepted Answer

A) True 
 B)False

Question 19

Auditing standards require the auditor's assessment of going concern issues.

Accepted Answer

A) True 
 B)False

Question 20

List four specific matters that should be included in a client representation letter.

Accepted Answer

• Management's acknowledgment of its res

Exam 24: Completing the Audit

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?

Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent

Which of the following is not a common audit procedure used to search for contingent liabilities?

The issuance of bonds by the client subsequent to the balance sheet date would require a footnote disclosure in, but no adjustment to, the financial statements under audit.

Contingent liability disclosure in the footnotes of the financial statements would normally be made when

A lawsuit has been filed against your client. If, in the opinion of legal counsel, the likelihood your client will lose the lawsuit is remote, no financial statement accrual or disclosure of the potential loss would generally be required.

Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses.

Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements.

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements?

There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including

Due to the unique nature of disclosures related to contingent liabilities and subsequent events, auditors often assess the risk as high that all required information may not be completely disclosed in the footnotes.

Subsequent events which require adjustment to the financial statements provide additional information about significant conditions/events which did not exist at the balance sheet date.

What are the three required conditions for a contingent liability to exist?

Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is

At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities.

Attorneys in recent years have become reluctant to provide certain information to auditors because of their own exposure to legal liability for providing incorrect or confidential information. State the two main reasons that attorneys refuse to provide the auditors with complete information.

Attorneys must report material violations of federal securities laws to the company's audit committee.

Auditing standards require the auditor's assessment of going concern issues.

List four specific matters that should be included in a client representation letter.

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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