Question 1

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 existing condition, situation, or set of circumstances involving uncertainty as the possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur. FASB ASC Topic 450, "Contingencies," states that when a contingent liability exists, the likelihood that the future event will result in a loss or impairment of an asset or the incurrence of a liability can be classified into three categories:
1. Probable. The future event is likely to occur. If the event is probable and the amount of the loss can be reasonably estimated, the loss is accrued by a charge to income.
2. Reasonably possible. The chance of the future event occurring is more than remote but less than likely. When the outcome of the event is judged to be reasonably possible or the amount cannot be estimated, a disclosure of the contingency is made in the footnotes to the financial statements.
3. Remote. The chance of the future event occurring is slight. In general, loss contingencies that are judged to be remote are not disclosed in the footnotes.
Examples of contingent liabilities include: pending or threatened litigation, actual or possible claims and assessments, income tax disputes, product warranties or defects, guarantees of obligations to others, and agreements to repurchase receivables that have been sold.

Question 2

"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

Accepted Answer

A)  Report on internal control. 
B)  Special report. 
C)  Management representation letter. 
D)  Letter for underwriters. 
A)  Report on internal control. 
B)  Special report. 
C)  Management representation letter. 
D)  Letter for underwriters. C

Question 3

State the two primary purposes of the management letter of representation.

Accepted Answer

• To corroborate oral representations made to the auditor and to document the continued appropriateness of such representations.
• To reduce the possibility of misunderstanding concerning management's responses to the auditor's inquiries.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless

Accepted Answer

A)  A lawsuit in which risk of loss was considered remote is resolved in the company's favor. 
B)  A development occurs that may affect the entity's ability to continue as a going concern. 
C)  A material fraud is initiated by an employee after the report is issued. 
D)  Evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered. 
A)  A lawsuit in which risk of loss was considered remote is resolved in the company's favor. 
B)  A development occurs that may affect the entity's ability to continue as a going concern. 
C)  A material fraud is initiated by an employee after the report is issued. 
D)  Evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.

Question 6

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

Accepted Answer

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. 
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.

Question 7

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

Accepted Answer

A)  Revising the audit plan. 
B)  Considering overall reasonableness of the financial statements. 
C)  Reviewing adequacy of evidence gathered to investigate unusual fluctuations. 
D)  Recalculating some of the ratios examined during audit planning. 
A)  Revising the audit plan. 
B)  Considering overall reasonableness of the financial statements. 
C)  Reviewing adequacy of evidence gathered to investigate unusual fluctuations. 
D)  Recalculating some of the ratios examined during audit planning.

Question 8

After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless

Accepted Answer

A)  New information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report. 
B)  Material adverse events occur after the date of the auditor's report. 
C)  Final determination or resolution was made on matters that had resulted in a qualification in the auditor's report. 
D)  Final determination or resolution was made of a contingency that had been disclosed in the financial statements and no liability arose from the resolution. 
A)  New information comes to the auditor's attention concerning an event that occurred prior to the date of the auditor's report that may have affected the auditor's report. 
B)  Material adverse events occur after the date of the auditor's report. 
C)  Final determination or resolution was made on matters that had resulted in a qualification in the auditor's report. 
D)  Final determination or resolution was made of a contingency that had been disclosed in the financial statements and no liability arose from the resolution.

Question 9

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

Accepted Answer

A)  This communication is required to occur before the auditor's report on the financial statements is issued. 
B)  This communication should include management changes in the application of significant accounting policies. 
C)  Any significant matter communicated to those charged with governance also should be communicated to management. 
D)  Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance. 
A)  This communication is required to occur before the auditor's report on the financial statements is issued. 
B)  This communication should include management changes in the application of significant accounting policies. 
C)  Any significant matter communicated to those charged with governance also should be communicated to management. 
D)  Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

Question 10

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

Accepted Answer

A)  A summary of specific audit procedures used. 
B)  Significant audit adjustments. 
C)  Consultations with other accountants. 
D)  Major issues discussed with management before the auditor was retained. 
A)  A summary of specific audit procedures used. 
B)  Significant audit adjustments. 
C)  Consultations with other accountants. 
D)  Major issues discussed with management before the auditor was retained.

Question 11

Ajax, Inc., is an affiliate of Borax, Inc. and is audited by another audit firm. Which of the following is most likely to be used by the auditor of Borax to obtain assurance that all guarantees by Borax of Ajax's indebtedness have been detected?

Accepted Answer

A)  Send the standard bank confirmation request to all of Borax's lender banks. 
B)  Review Borax board minutes and obtain a representation letter. 
C)  Examine supporting documents for all entries in intercompany accounts. 
D)  Obtain written confirmation of indebtedness from the auditor of Ajax. 
A)  Send the standard bank confirmation request to all of Borax's lender banks. 
B)  Review Borax board minutes and obtain a representation letter. 
C)  Examine supporting documents for all entries in intercompany accounts. 
D)  Obtain written confirmation of indebtedness from the auditor of Ajax.

Question 12

As part of an audit, a CPA often requests a 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 13

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 14

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

Accepted Answer

A)  Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters. 
B)  Significant audit adjustments recorded by the company 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 audit adjustments recorded by the company. 
D)  Neither significant audit adjustments recorded by the company nor management's consultation with other accountants about significant accounting matters. 
A)  Significant audit adjustments recorded by the company and management's consultation with other accountants about significant accounting matters. 
B)  Significant audit adjustments recorded by the company 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 audit adjustments recorded by the company. 
D)  Neither significant audit adjustments recorded by the company nor management's consultation with other accountants about significant accounting matters.

Question 15

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?

Accepted Answer

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. 
C)  New information is discovered concerning undisclosed lease transactions in the audited period. 
D)  A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold. 
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. 
C)  New information is discovered concerning undisclosed lease transactions in the audited period. 
D)  A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold.

Question 16

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

Accepted Answer

A)  An analysis of related party transactions for the discovery of possible irregularities. 
B)  A review of the cut-off bank statements for the period after the year-end. 
C)  An inquiry of the entity's legal counsel concerning litigation. 
D)  An investigation of material weaknesses in internal control previously communicated to the entity. 
A)  An analysis of related party transactions for the discovery of possible irregularities. 
B)  A review of the cut-off bank statements for the period after the year-end. 
C)  An inquiry of the entity's legal counsel concerning litigation. 
D)  An investigation of material weaknesses in internal control previously communicated to the entity.

Question 17

The management letter is used

Accepted Answer

A)  To allow management to corroborate 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 corroborate 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 18

On February 25, a CPA issued an auditor's report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to

Accepted Answer

A)  Notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied upon. 
B)  Notify each member of the entity's board of directors about management's refusal to adjust the financial statements. 
C)  Issue revised financial statements and distribute them to each creditor known to be relying on the financial statements. 
D)  Issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements. 
A)  Notify the entity's creditors that the financial statements and the related auditor's report should no longer be relied upon. 
B)  Notify each member of the entity's board of directors about management's refusal to adjust the financial statements. 
C)  Issue revised financial statements and distribute them to each creditor known to be relying on the financial statements. 
D)  Issue a revised auditor's report and distribute it to each creditor known to be relying on the financial statements.

Question 19

From the list below, select the procedures that an auditor would use to test for contingent liabilities.
a. Inquire of SEC officials regarding reported violations by the entity that create claims.
b. Read the entity's contracts, loan agreements, leases, and other documents.
c. Read the entity's minutes of meetings of shareholders, directors, and committees.
d. Request a representation letter from all the entity's employees.
e. Read the legal briefs of all suits filed against the entity's competitors.
f. Request the entity's management to prepare a letter of inquiry to the entity's attorney regarding pending litigation against the entity.

Accepted Answer

Audit procedures 'b,

Question 20

The date of the management representation letter should coincide 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.

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

"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

State the two primary purposes of the management letter of representation.

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

After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless

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

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

After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

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

Ajax, Inc., is an affiliate of Borax, Inc. and is audited by another audit firm. Which of the following is most likely to be used by the auditor of Borax to obtain assurance that all guarantees by Borax of Ajax's indebtedness have been detected?

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

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?

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

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?

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

The management letter is used

The date of the management representation letter should coincide with the

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 Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing 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

Filters

Exam 17: Completing the Audit Engagement

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

"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

State the two primary purposes of the management letter of representation.

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

After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless

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

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

After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

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

Ajax, Inc., is an affiliate of Borax, Inc. and is audited by another audit firm. Which of the following is most likely to be used by the auditor of Borax to obtain assurance that all guarantees by Borax of Ajax's indebtedness have been detected?

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

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?

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

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?

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

The management letter is used

The date of the management representation letter should coincide with the

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 Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing 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

Filters