Question 1

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

Accepted Answer

A) the outcome of the event is judged to be probable and the loss can be reasonably estimated. 
B) the loss can be reasonably estimated, but the outcome is unknown. 
C) the outcome of the event is judged to be reasonably possible or the loss cannot be reasonably estimated. 
D) the outcome is unknown and the loss is reasonably estimable but the entity does not want to book the loss. 
A) the outcome of the event is judged to be probable and the loss can be reasonably estimated. 
B) the loss can be reasonably estimated, but the outcome is unknown. 
C) the outcome of the event is judged to be reasonably possible or the loss cannot be reasonably estimated. 
D) the outcome is unknown and the loss is reasonably estimable but the entity does not want to book the loss.

Question 2

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

Accepted Answer

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. 
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.

Question 3

Define the term "contingent liability" and discuss the criteria used to classify these events or conditions. Provide some examples of contingent liabilities.

Accepted Answer

A contingent liability is defined as an

Question 4

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?

Accepted Answer

A) To provide audit evidence. 
B) To emphasize to the entity their responsibility for the fairness of the financial statements. 
C) To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed. 
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. 
A) To provide audit evidence. 
B) To emphasize to the entity their responsibility for the fairness of the financial statements. 
C) To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed. 
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.

Question 5

The responsibility to assess the entity's ability to continue as a going concern rests solely with the auditor.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

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. 
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.

Question 7

Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

Accepted Answer

Type I. Subsequent events that provide a

Question 8

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?

Accepted Answer

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

Question 9

The management letter is used:

Accepted Answer

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

Question 10

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?

Accepted Answer

A) Inspecting title documents to verify whether any assets are pledged as collateral. 
B) Confirming with third parties the details of arrangements to maintain financial support. 
C) Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation. 
D) Comparing the entity's depreciation and asset capitalization policies to other entities in the industry. 
A) Inspecting title documents to verify whether any assets are pledged as collateral. 
B) Confirming with third parties the details of arrangements to maintain financial support. 
C) Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation. 
D) Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Question 11

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

Accepted Answer

A) date of the latest subsequent event referred to in the notes to the financial statements. 
B) balance sheet date. 
C) date of the auditor's report. 
D) date of the engagement agreement. 
A) date of the latest subsequent event referred to in the notes to the financial statements. 
B) balance sheet date. 
C) date of the auditor's report. 
D) date of the engagement agreement.

Question 12

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:

Accepted Answer

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. 
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.

Question 13

"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):

Accepted Answer

A) entity engagement letter. 
B) report on compliance with laws and regulations. 
C) management representation letter. 
D) attestation report on internal controls. 
A) entity engagement letter. 
B) report on compliance with laws and regulations. 
C) management representation letter. 
D) attestation report on internal controls.

Question 14

For which of the following matters should an auditor obtain written management representations?

Accepted Answer

A) Management's cost-benefit justifications for not correcting internal control weaknesses. 
B) Management's knowledge of future plans that may affect the price of the entity's stock. 
C) Management's addressing control deficiencies communicated to the audit committee during previous engagements. 
D) Management's acknowledgment of its responsibility for employees' violations of laws. 
A) Management's cost-benefit justifications for not correcting internal control weaknesses. 
B) Management's knowledge of future plans that may affect the price of the entity's stock. 
C) Management's addressing control deficiencies communicated to the audit committee during previous engagements. 
D) Management's acknowledgment of its responsibility for employees' violations of laws.

Question 15

Dual dating is used to identify unrecorded contingent liabilities.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following auditing procedures is ordinarily performed last?

Accepted Answer

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. 
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. 
D) Obtaining a management representation letter.

Question 17

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

Accepted Answer

A) Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records. 
B) Ask legal counsel about any developments relating to litigation, claims, or assessments against the company. 
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. 
A) Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records. 
B) Ask legal counsel about any developments relating to litigation, claims, or assessments against the company. 
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.

Question 18

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

Accepted Answer

A) balance sheet date. 
B) date of the auditor's report. 
C) balance sheet date but prior to the issuance of the financial statements. 
D) date of the auditor's report and concern contingencies that are not reflected in the financial statements. 
A) balance sheet date. 
B) date of the auditor's report. 
C) balance sheet date but prior to the issuance of the financial statements. 
D) date of the auditor's report and concern contingencies that are not reflected in the financial statements.

Question 19

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

Accepted Answer

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. 
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.

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 17: Completing the Audit Engagement

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

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

Define the term "contingent liability" and discuss the criteria used to classify these events or conditions. Provide some examples of contingent liabilities.

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?

The responsibility to assess the entity's ability to continue as a going concern rests solely with the auditor.

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

Identify the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.

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?

The management letter is used:

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?

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

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:

"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):

For which of the following matters should an auditor obtain written management representations?

Dual dating is used to identify unrecorded contingent liabilities.

Which of the following auditing procedures is ordinarily performed last?

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

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

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

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.

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

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