Question 1

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.

Question 2

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements.Which of the following statements is not true?

Accepted Answer

A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. 
B) Disclosure may be unnecessary if the contingency is highly remote or immaterial. 
C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys. 
D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.

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 proper accounting treatment?

Accepted Answer

The answer of An environmental clean-up lawsuit is pending against...

Question 4

If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion.

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

Which of the following is not considered a commitment?

Accepted Answer

A) Agreements to purchase raw materials 
B) Pension plans 
C) Agreements to lease facilities at set prices 
D) Each of the above is a commitment.

Question 7

The audit firm issues an audit report for its client.The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless:

Accepted Answer

A) a development occurs that may affect the company's long term viability as a company. 
B) final resolution was made on disclosed contingency for which no liability needed to be accrued. 
C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. 
D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.

Question 8

Auditors must communicate in writing about internal control weaknesses to the audit committee or those charged with governance.

Accepted Answer

A) True 
 B)False

Question 9

Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit.

Accepted Answer

A) True 
 B)False

Question 10

Auditors of public companies must obtain certain representations from management regarding internal control over financial reporting.

Accepted Answer

A) True 
 B)False

Question 11

With what types of contingencies might an auditor be concerned?

Accepted Answer

The answer of With what types of contingencies might an...

Question 12

Auditing standards require that the auditor 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.

Question 13

If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s)may the auditor use on the report?

Accepted Answer

A)   
B)   
C)   
D)

Question 14

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.

Question 15

Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering:

Accepted Answer

A)   
B)   
C)   
D)

Question 16

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

Question 17

When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's officials.

Accepted Answer

A) True 
 B)False

Question 18

Auditors, as part of completing the audit, will request the client to send a letter of inquiry to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company.The primary reason the auditor requests this information is to:

Accepted Answer

A) determine the range of probable loss for asserted claims. 
B) corroborate of information supplied by management concerning litigation, claims, and assessments. 
C) outside opinion of probability of losses in determining accruals for contingencies. 
D) outside opinion of probability of losses in determining the proper footnote disclosure.

Question 19

Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report.

Accepted Answer

A) True 
 B)False

Question 20

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) Loss of a plant as a result of a flood 
B) Sale of long-term debt or capital stock 
C) Settlement of litigation in excess of the recorded liability 
D) Major purchase of a business that is expected to double the sales volume

Exam 24: Completing the Audit

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

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements.Which of the following statements is not true?

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 proper accounting treatment?

If the client refuses to prepare and sign a letter of representation, the auditor would be required to issue either a qualified opinion or a disclaimer of opinion.

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.

Which of the following is not considered a commitment?

The audit firm issues an audit report for its client.The auditor's have NO obligation to make further inquiries with respect to the client's audited financial statements unless:

Auditors must communicate in writing about internal control weaknesses to the audit committee or those charged with governance.

Current professional auditing standards require the performance of analytical procedures during the planning and completion phases of the audit.

Auditors of public companies must obtain certain representations from management regarding internal control over financial reporting.

With what types of contingencies might an auditor be concerned?

Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least:

If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report?

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:

Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering:

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?

When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's officials.

Auditors, as part of completing the audit, will request the client to send a letter of inquiry to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company.The primary reason the auditor requests this information is to:

Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report.

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?