Question 1

State 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 1: Events that have a direct effe

Question 2

Client representation letters are required by professional auditing standards, whereas management letters are optional.

Accepted Answer

A) True 
 B)False

Question 3

An environmental clean-up lawsuit is pending against your client. What information about the lawsuit would you as the auditor need in order to determine the "correct" accounting?

Accepted Answer

Three conditions are required for a cont

Question 4

Auditors are required to evaluate the going concern assumption as part of each audit.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

Auditing standards (SAS No. 59) requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least:

Accepted Answer

A)  one quarter beyond the balance sheet date. 
B)  one quarter beyond the date of the auditor's report. 
C)  one year beyond the balance sheet date. 
D)  one year beyond the date of the auditor's report. 
A)  one quarter beyond the balance sheet date. 
B)  one quarter beyond the date of the auditor's report. 
C)  one year beyond the balance sheet date. 
D)  one year beyond the date of the auditor's report.

Question 8

The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time:

Accepted Answer

A)  beginning with the balance sheet date and ending with the date of the auditor's report. 
B)  beginning with the start of the fiscal year under audit and ending with the balance sheet date. 
C)  beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. 
D)  beginning with the balance sheet date and ending with the date the registration statement becomes effective. 
A)  beginning with the balance sheet date and ending with the date of the auditor's report. 
B)  beginning with the start of the fiscal year under audit and ending with the balance sheet date. 
C)  beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. 
D)  beginning with the balance sheet date and ending with the date the registration statement becomes effective.

Question 9

Auditors often integrate procedures for presentation and disclosure objectives with:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 10

A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee?

Accepted Answer

A)  Review minutes and resolutions of the board of directors. 
B)  Review prior year's audit files with respect to such guarantees. 
C)  Review the possibility of such guarantees with the chief accountant. 
D)  Review the legal letter returned by the company's outside legal counsel. 
A)  Review minutes and resolutions of the board of directors. 
B)  Review prior year's audit files with respect to such guarantees. 
C)  Review the possibility of such guarantees with the chief accountant. 
D)  Review the legal letter returned by the company's outside legal counsel.

Question 11

Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?

Accepted Answer

A)  Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. 
B)  Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. 
C)  Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. 
D)  Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments. 
A)  Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. 
B)  Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. 
C)  Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. 
D)  Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.

Question 12

The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in category 2?

Accepted Answer

A)  Correspond with attorneys. 
B)  Test the collectability of accounts receivable by reviewing subsequent period cash receipts. 
C)  Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. 
D)  Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation. 
A)  Correspond with attorneys. 
B)  Test the collectability of accounts receivable by reviewing subsequent period cash receipts. 
C)  Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. 
D)  Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation.

Question 13

You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to:

Accepted Answer

A)  accrue a $4 million liability. 
B)  disclose a liability and provide a range of outcomes. 
C)  since there is less than a 50% chance of occurrence, ignore. 
D)  since there is greater that a remote chance of occurrence, accrue the $10 million. 
A)  accrue a $4 million liability. 
B)  disclose a liability and provide a range of outcomes. 
C)  since there is less than a 50% chance of occurrence, ignore. 
D)  since there is greater that a remote chance of occurrence, accrue the $10 million.

Question 14

Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?

Accepted Answer

A)  discovery of the inclusion of material nonexistent sales 
B)  discovery of the failure to write off material obsolete inventory 
C)  discovery of the omission of a material footnote 
D)  decrease in the value of investments 
A)  discovery of the inclusion of material nonexistent sales 
B)  discovery of the failure to write off material obsolete inventory 
C)  discovery of the omission of a material footnote 
D)  decrease in the value of investments

Question 15

Besides the search for contingent liabilities and the review for subsequent events, the auditor has four important final evidence accumulation responsibilities, all of which are required by current professional auditing standards. Discuss each of these four responsibilities.

Accepted Answer

• Final analytical procedures performed

Question 16

A CPA has received an attorney's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's lawyer shortly after receipt of the letter should alert the auditor that:

Accepted Answer

A)  an adverse opinion will be necessary. 
B)  undisclosed unasserted claims may have arisen. 
C)  the auditor must begin a completely new examination of contingent liabilities. 
D)  the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments. 
A)  an adverse opinion will be necessary. 
B)  undisclosed unasserted claims may have arisen. 
C)  the auditor must begin a completely new examination of contingent liabilities. 
D)  the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments.

Exam 24: Completing the Audit

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

Client representation letters are required by professional auditing standards, whereas management letters are optional.

An environmental clean-up lawsuit is pending against your client. What information about the lawsuit would you as the auditor need in order to determine the "correct" accounting?

Auditors are required to evaluate the going concern assumption as part of each audit.

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.

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

Auditing standards (SAS No. 59) requires the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least:

The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time:

Auditors often integrate procedures for presentation and disclosure objectives with:

A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee?

Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?

You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to:

Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?

Besides the search for contingent liabilities and the review for subsequent events, the auditor has four important final evidence accumulation responsibilities, all of which are required by current professional auditing standards. Discuss each of these four responsibilities.

A CPA has received an attorney's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's lawyer shortly after receipt of the letter should alert the auditor that:

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

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 and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and 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 Balances

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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