Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Match between columns
                        Premises:  On April 5, 2012, you discovered that on February 16, 2012, a flood destroyed the entire uninsured inventory in one of Pumpkin's warehouses.
 On February 17, 2012, you discovered that on February 16, 2012, a flood destroyed the entire uninsured inventory in one of Pumpkin's warehouses.
 On February 17, 2012, you discovered that on November 30, 2011, a flood destroyed the entire uninsured inventory in one of Pumpkin's warehouses.
 On April 5, 2012, you discovered that on March 30, 2012, a fire destroyed one of Pumpkin's 10 plants.
 On April 7, 2012, you discovered that a debtor of Pumpkin went bankrupt on January 6, 2012.
 On January 16, 2012, a lawsuit was filed against Pumpkin for a patent infringement action that allegedly took place in early 2001. In the opinion of Pumpkin's attorneys, there is a reasonable (but not probable) danger of a significant loss to Pumpkin.
 On February 19, 2012, Pumpkin settled a lawsuit out of court that had originated in 2000 and is currently listed as a contingent liability.

Accepted Answer

The Answer of Adjust the December 31, 2011 financial statements. is...

Question 3

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

Accepted Answer

A)  A merger discussion. 
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 client's sales if agreement is successful. 
D)  The bankruptcy of a customer who regularly purchased 30 percent of the company's output.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

An example of a Type II event or condition is an uncollectible account receivable resulting from continued deterioration of a customer's financial condition leading to bankruptcy after the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  The basis for assessing control risk below the maximum. 
B)  The process used by management in formulating sensitive accounting estimates. 
C)  The auditor's preliminary judgments about materiality levels. 
D)  The justification for performing substantive procedures at interim dates.

Question 7

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 client'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 8

Your audit client,Pretty People Incorporated,is the defendant in a pending discrimination lawsuit.What information about the lawsuit would you,as an auditor,need to know to decide whether to disclose the litigation in the financial statements?

Accepted Answer

The answer of Your audit client,Pretty People Incorporated,is the defendant...

Question 9

An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of field work but before issuance of the auditor's report.The auditor's responsibility for events occurring subsequent to the completion of field work 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 field work.

Question 10

The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with

Accepted Answer

A)  A description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet. 
B)  An expert opinion as to whether a loss is possible, probable, or remote. 
C)  The opportunity to examine the documentation concerning litigation, claims, and assessments. 
D)  Corroboration of the information furnished by management concerning litigation, claims, and assessments.

Question 11

"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(an)

Accepted Answer

A)  Client engagement letter. 
B)  Report on compliance with laws and regulations. 
C)  Management representation letter. 
D)  Attestation report on internal controls.

Question 12

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

Accepted Answer

A)  Asserted claims and litigation. 
B)  Matters to which the attorney has given substantive attention in the form of legal consultation or representation. 
C)  Asserted, overtly threatened, or pending claims and litigation. 
D)  Items that have an extremely high probability of being resolved to the client's detriment.

Question 13

Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.

Accepted Answer

The answer of Discuss the steps used by an auditor...

Question 14

What is the difference between a contingent liability and a commitment?

Accepted Answer

The answer of What is the difference between a contingent...

Question 15

After an audit report containing an unqualified opinion on a nonpublic client's financial statements is issued,the auditor learns that the client has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income.The auditor should

Accepted Answer

A)  Determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued. 
B)  Notify the entity that the auditor's report may no longer be associated with the financial statements. 
C)  Describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements. 
D)  Take no action because the auditor has no obligation to make any further inquiries.

Question 16

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.

Question 17

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

Accepted Answer

A)  Honor the confidentiality of the client-lawyer relationship. 
B)  Consider the refusal to be a scope limitation. 
C)  Seek to obtain the corroborating information from management. 
D)  Disclose this fact in a footnote to the financial statements.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  Any matters communicated to those charged with governance are also required to be communicated to the entity's management. 
B)  The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. 
C)  The auditor does not have any requirement to communicate with anyone outside of management. 
D)  Weaknesses in internal control previously reported to those charged with governance are required to be communicated to those charged with governance after each subsequent audit until the weaknesses are corrected.

Question 20

Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation,claims,and assessments?

Accepted Answer

A)  Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. 
B)  Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. 
C)  Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are likely to be asserted and must be disclosed. 
D)  Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

Exam 17: Completing the Audit Engagement

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

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

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

An example of a Type II event or condition is an uncollectible account receivable resulting from continued deterioration of a customer's financial condition leading to bankruptcy after the balance sheet date.

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

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

Your audit client,Pretty People Incorporated,is the defendant in a pending discrimination lawsuit.What information about the lawsuit would you,as an auditor,need to know to decide whether to disclose the litigation in the financial statements?

An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of field work but before issuance of the auditor's report.The auditor's responsibility for events occurring subsequent to the completion of field work was

The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with

"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(an)

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

Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.

What is the difference between a contingent liability and a commitment?

After an audit report containing an unqualified opinion on a nonpublic client's financial statements is issued,the auditor learns that the client has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income.The auditor should

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

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

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

Which of the following is not an audit procedure that the independent auditor would perform with respect to litigation,claims,and assessments?