Auditing & Accounting Chapter 17 TB

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Chapter 17 - Completing the Audit Engagement

Chapter 17 Completing the Audit Engagement True / False Questions

1. Every contingent liability must be recorded. True False

2. An example o a contingent liability is an income tax dispute. True False

!. "eading contracts and loan agreements is one #ay to identiy unrecorded contingent liabilities. True False

$. A legal letter #ill include and evaluate all contingent liabilities o the company. True False

%. Type && subse'uent events are conditions that re'uire an ad(ustment to the account balance sho#n on the inancial statements. True False

). An example o a Type & event or condition is the settlement o a la#suit ater the balance sheet date or an amount dierent d ierent rom the amount recorded in the year-end inancial statements. True False

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Chapter 17 - Completing the Audit Engagement

7. An example o a Type && event or condition is an uncollectible account receivable resulting rom continued deterioration o a customer*s inancial condition leading to ban+ruptcy ater the balance sheet date. True False

,. ual dating is used to identiy unrecorded contingent liabilities. True False

. The auditor must perorm inal analytical procedures beore deciding on the appropriate audit report to issue or the entity. True False

1/. & there is substantial doubt about the entity*s ability to continue as a going concern0 con cern0 the auditor should obtain inormation about management*s plans to mitigate the problem and assess the li+elihood that such plans can be implemented. True False

Multiple Choice Questions

11. hen auditing contingent liabilities0 #hich o the ollo#ing procedures #ould be least eective A. "eading the minutes o the board o directors 3. "evie#ing the ban+ conirmation co nirmation letter  C. Examining customer conirmation replies . Examining invoices or proessional services

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Chapter 17 - Completing the Audit Engagement

12. hen obtaining evidence regarding litigation against a client0 the C4A #ould be least interested in determining A. An estimate o #hen the matter #ill be resolved 3. The period in #hich the underlying cause o the litigation occurred C. The probability o an unavorable u navorable outcome . An estimate o the potential loss

1!. The auditor*s primary means o obtaining corroboration o management*s inormation concerning litigation is a A. 5etter o audit in'uiry to the client*s la#yer  3. 5etter o corroboration rom the auditor*s la#yer upon revie# o the legal documentation C. Conirmation o claims and assessments rom the other parties to the litigation . Conirmation o claims and assessments rom an oicer o the court presiding over the litigation

1$. An auditor should obtain evidential matter relevant to all the ollo#ing actors concerning third-party litigation against a client except the A. 4eriod in #hich the underlying und erlying cause or legal action occurred 3. 4robability o an unavorable outcome C. 6urisdiction in #hich the matter #ill be resolved . Existence o a situation indicating an uncertainty as to the possible loss

1%. An auditor #ill ordinarily examine invoices rom la#yers primarily in order to A. ubstantiate accruals 3. Assess the legal ramiications o litigation in progress C. Estimate the dollar amount o contingent liabilities . &dentiy possible unasserted litigation0 claims0 and assessments

1). & a la#yer reuses to urnish corroborating inormation regarding litigation0 claims0 and assessments0 the auditor should A. 8onor the conidentiality o the client-la#yer relationship 3. Consider the reusal to be a scope limitation C. ee+ to obtain the corroborating inormation rom management . isclose this act in a ootnote to the inancial statements

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Chapter 17 - Completing the Audit Engagement

17. The reusal o a client*s attorney to provide a representation on the legality o a particular act committed by the client is generally A. uicient reason to issue a 9sub(ect to9 'ualiied opinion 3. Considered to be a scope limitation C. &nsuicient reason to modiy the auditor*s report because o the attorney*s obligation o conidentiality . 4roper grounds to #ithdra# rom the engage ment #ithout urther consideration

1,. hich o the ollo#ing material events occurring subse'uent to the balance sheet date #ould re'uire an ad(ustment to the inancial statements beore they could be issued A. ale o long-term debt or capital stoc+  3. 5oss o a plant as a result o a lood C. :a(or purchase o a business that is expected to double sales volume . ettlement o litigation0 in excess o the previously recorded liability

1. hich o the ollo#ing situations #ould re'uire ad(ustment to o r disclosure in the inancial statements A. A merger discussion 3. The application or a patent on a ne# production process C. iscussions #ith a customer that could lead to a $/ percent increase in the client*s sales i agreement is successul . The ban+ruptcy o a customer #ho regularly purchased !/ percent o the company*s output

2/. An example o a Type 1 subse'uent event is A. A tornado that destroys a client*s actory ater the balance sheet date 3. An event ater the balance sheet date that conirms the auditor*s belie ;documented prior to the end o the client*s iscal year< that a large portion o the client*s inventory is obsolete C. =otiication o an &" audit ater the balance sheet date . The client*s 3oard o irectors unexpectedly resigns ater the balance sheet date

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Chapter 17 - Completing the Audit Engagement

21. An auditor issued an audit report that #as dual dated or a subse'uent event that occurred ater the completion o ield #or+ but beore issuance o the auditor*s report. The auditor*s responsibility or events occurring subse'uent to the completion o ield #or+ #as A. 5imited to the speciic event reerenced 3. 5imited to include only events occurring beore the date o the last subse'uent event reerenced C. Extended to subse'uent events occurring through the date o issuance o the report . Extended to include all events occurring since the completion o ield #or+ 

22. hich o the ollo#ing procedures should an auditor generally perorm regarding subse'uent events A. Compare the latest available interim inancial statements issued ater year-end #ith the inancial statements being audited 3. end second re'uests to the client*s customers #ho ailed to respond to initial accounts receivable conirmation re'uests C. Communicate material #ea+nesses in internal controls to those charged #ith governance . "evie# the cuto ban+ statements or several months ater year-end

2!. The purpose o analytical procedures at the completion o the audit includes all o the ollo#ing except A. "evising the audit plan 3. Considering overall reasonableness o the inancial statements C. "evie#ing ade'uacy o evidence gathered to investigate unusual luctuations . "ecalculating some o the ratios examined during audit planning

2$. hich o the ollo#ing auditing procedures is ordinarily perormed last A. Conirming accounts payable 3. Testing the purchasing unction C. "eading the minutes o directors* meetings . >btaining a management representation letter 

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Chapter 17 - Completing the Audit Engagement

2%. The date o the management representation letter should coincide #ith the A. ate o the latest subse'uent event reerred to in the notes to the inancial statements 3. 3alance sheet date C. ate o the auditor*s report . ate o the engagement agreement

2). hich o the ollo#ing items should an auditor communicate to those charged #ith governance in a publicly-held entity A. igniicant audit ad(ustments recorded by the en tity and management*s consultation #ith other accountants about signiicant accounting matters 3. igniicant audit ad(ustments recorded by the en tity but not management*s consultation #ith other accountants about signiicant accounting matters C. :anagement*s consultation #ith other accountants abou t signiicant accounting matters but not signiicant audit ad(ustments recorded by the entity . =either signiicant audit ad(ustments recorded by the entity nor management*s consultation #ith other accountants about signiicant accounting matters

27. The management letter is used A. To allo# management to corroborate oral representations to the auditor  3. To conirm the terms o the audit engagement C. To list all reportable conditions #ith respect to internal controls . To ma+e recommendations to the client based on observations made during the audit

2,. A(ax0 &nc. is an ailiate o the audit client and is audited by another audit irm. hich o the ollo#ing is most li+ely to be used by the auditor to obtain assurance that all guarantees by the client o the ailiate*s indebtedness have been detected A. end the standard ban+ conirmation re'uest to all the client*s lender ban+s 3. "evie# client minutes and obtain a representation letter  C. Examine supporting documents or all entries in intercompany accounts . >btain #ritten conirmation o indebtedness rom the auditor o the ailiate

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Chapter 17 - Completing the Audit Engagement

2. ?enerally0 loss contingencies that are (udged to be remote@ A. hould be disclosed in the ootnotes 3. hould be recorded in the inancial statements C. hould not be disclosed in the ootnotes . hould be recorded in the inancial statements and the ootnotes

!/. hich o the ollo#ing procedures #ould an auditor most li+ely perorm to obtain evidence about an entity*s subse'uent events A. "econcile ban+ activity or the month ater the balance sheet date #ith cash activity relected in the accounting records 3. >btain a letter rom the entity*s attorney describing an y pending litigation0 unasserted claims0 or loss contingencies C. "evie# the treasurer*s monthly reports on temporary investments o#ned0 purchased0 and sold . Examine on a test basis the purchase invoices and receiving reports or several d ays ater the inventory date

!1. hich o the ollo#ing procedures #ould an auditor ordinarily perorm during the revie# o subse'uent events A. An analysis o related party transactions or the discovery o  possible irregularities 3. A revie# o the cut-o ban+ statements or the period ater the year-end C. An in'uiry o the client*s legal counsel concerning litigation . An investigation o material #ea+nesses in internal control previously communicated to the client

!2. hich o the ollo#ing is not  an audit procedure that the independent auditor #ould  perorm #ith respect to litigation0 claims and assessments A. &n'uire o and discuss #ith management the policies and procedures adopted or identiying0 evaluating0 and accounting or litigation0 claims0 and assessments 3. >btain rom management a description and evaluation o litigation0 claims0 and assessments that existed at the balance sheet date C. >btain assurance rom management that it has disclosed all unasserted claims that the la#yer has advised are li+ely to be asserted and must be disclosed . Conirm directly #ith the client*s la#yer that all claims have be en recorded in the inancial statements

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!!. An attorney is responding to an independent auditor as a result o the audit client*s letter o in'uiry. The attorney may appropriately limit the response to A. Asserted claims and litigation 3. :atters to #hich the attorney has given substantive attention in the orm o legal consultation or representation C. Asserted0 overtly threatened0 or pending claims and litigation . &tems #hich have an extremely high probability o being resolved to the client*s detriment

!$. hich o the ollo#ing is generally re'uested in a legal letter A. A re'uest that the attorney comment on unasserted claims #here his or her vie#s dier rom management*s evaluation 3. A list o all attorneys that perormed any #or+ or the entity during the year  C. A statement indicating that the attorney is responsible or the air presentation o unasserted claims in the entity*s inancial statements . A re'uest that the attorney provide a copy o all invoices given to the client during the year 

!%. hich o the ollo#ing subse'uent events #ill be least li+ely to result in an ad(ustment to the inancial statements A. Culmination o events aecting the realiation o accounts receivable o#ned as o the  balance sheet date 3. Culmination o events aecting the realiation o inventories o#ned as o the balance sheet date C. :aterial changes in the settlement o liabilities #hich #ere estimated as o the balance sheet date . :aterial changes in the 'uoted mar+et prices o listed investment securities since the  balance sheet date

!). ubse'uent events or #hich the auditor has a responsibility to actively search are d eined as events #hich occur subse'uent to the A. 3alance sheet date 3. ate o the auditor*s report C. 3alance sheet date but prior to the date o the auditor*s report . ate o the auditor*s report and concern contingencies #hich are not relected in the inancial statements

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Chapter 17 - Completing the Audit Engagement

!7. An auditor is concerned #ith completing various phases o the examination ater the  balance sheet date. This 9subse'uent period9 involving ormal auditor procedures extends to the date o the A. Auditor*s report 3. Final revie# o the audit #or+ing papers C. 4ublic issuance o the inancial statements . elivery o the auditor*s report to the client

!,. A ma(or customer o an audit client suers a ire ater year end0 but (ust prior to completion o audit ield #or+. The audit client believes that this event could have a signiicant direct eect on the inancial statements. The auditor should A. Advise management to disclose the event in notes to the inancial statements 3. isclose the event in the auditor*s report C. ithhold submission o the auditor*s report until the extent o the direct eect on the inancial statements is +no#n . Advise management to ad(ust the inancial statements

!. & an auditor dates the auditor*s report on inancial statements or the year ended ecember !10 2//0 as o February 1/0 2/1/0 except or =ote 60 as to #hich the date is :arch !0 2/1/0 the auditor is ac+no#ledging responsibility to actively search or and ensure proper handling by management o A. All subse'uent events occurring through :arch !0 2/1/ 3. All subse'uent events occurring through February 1/0 2/1/ C. All subse'uent events occurring through February 1/0 2/1/ and the speciic subse'uent event reerred to in =ote 6 through :arch !0 2/1/ . >nly the speciic subse'uent event reerred to in =ote 6 as o :arch !0 2/1/

$/. 8arvey0 C4A is preparing an audit program or the purpose o ascertaining the occurrence o subse'uent events that may re'uire ad(ustment or disclosure essential to a air presentation o the inancial statements in conormity #ith generally accepted accounting principles. hich one o the ollo#ing procedures #ould be least appropriate or this purpose A. Conirm0 as o the completion o ield #or+0 accounts receivable that have increased signiicantly rom the year-end date 3. "ead the minutes o the board o directors C. &n'uire o management concerning events that may have occurred . >btain a la#yer*s letter as o the completion o ield #or+ 

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Chapter 17 - Completing the Audit Engagement

$1. A Type && subse'uent event usually re'uires@ A. An ad(ustment to the inancial statements and the ootnotes 3. An ad(ustment to the inancial statements but no special disclosure is re'uired C. isclosure in the ootnotes . =either an ad(ustment to the inancial statements nor d isclosure in the ootnotes

$2. Ater ield #or+ audit procedures are completed0 a partner o the C4A irm #ho has not  been involved in the audit perorms a second or #rap-up revie# o the #or+ing papers. This second revie# usually ocuses on A. The audit report0 inancial statements0 and ootnotes or consistency 3. &rregularities involving the client*s management and its employees C. The materiality o the ad(usting entries proposed by the audit sta  . The communication o internal control #ea+n esses to those charged #ith governance

$!. &n the course o the examination o inancial statements or the purpose o expressing an opinion0 the auditor normally prepares a schedule o unad(usted dierences or #hich the auditor did not propose ad(ustments #hen they #ere discovered. hat is the primary purpose o this schedule A. To point out to the responsible client oicials the errors made by various company  personnel 3. To summarie the ad(ustments that must be made beore the company can prepare and submit its ederal tax return C. To identiy the potential inancial statement eects o errors or disputed items that #ere considered immaterial #hen discovered . To summarie the errors made by the company so that corrections can be made ater the audited inancial statements are released

$$. hich o the ollo#ing ratios is least li+ely to assist the auditor in determining #hether the client is experiencing inancial diiculties A. =et #orthBtotal liabilities 3. CashBtotal assets C. Total liabilitiesBtotal assets . =et income beore taxesBnet sales

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Chapter 17 - Completing the Audit Engagement

$%. As part o an audit0 a C4A oten re'uests a representation letter rom the client. hich one o the ollo#ing is not a valid purpose o such a letter A. To provide audit evidence 3. To emphasie to the client their responsibility or the airness o the inancial statements C. To satisy himsel or hersel that a certain account balance is airly stated #hen certain customary auditing procedures are not perormed . To provide possible protection to the C4A against a charge o +no#ledge in cases #here raud is subse'uently discovered to have existed in the accounts

$). hich o the ollo#ing expressions is least li+ely to be included in a client*s representation letter A. =o events have occurred subse'uent to the balance sheet date that re'uire ad(ustment to or disclosure in0 the inancial statements 3. The company has complied #ith all aspects o contractual agreements that #ould have a material eect on the inancial statements in the event o noncompliance C. :anagement ac+no#ledges responsibility or illegal actions committed by its employees . :anagement has made available all inancial statements and related data

$7. 9There are no violations or possible violations o la#s or regulations #hose eects should  be considered or disclosure in the inancial statements or as a basis or recording a loss contingency.9 The oregoing passage most li+ely is rom a;an< A. Client engagement letter  3. "eport on compliance #ith la#s and regulations C. :anagement representation letter  . Attestation report on internal controls

$,. hich o the ollo#ing matters is an auditor re'uired to communicate to those charged #ith governance A. The basis or assessing control ris+ belo# the maximum 3. The process used by management in ormulating sensitive accounting estimates C. The auditor*s preliminary (udgments about materiality levels . The (ustiication or perorming substantive procedures at interim dates

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Chapter 17 - Completing the Audit Engagement

$. 9There have been no communications rom regulatory agencies concerning noncompliance #ith or deiciencies in0 inancial reporting p ractices that could have a material eect on the inancial statements.9 The oregoing passage is most li+ely rom a A. "eport on internal control 3. pecial report C. :anagement representation letter  . 5etter or under#riters

%/. hen considering the use o management*s #ritten representations as audit evidence about the completeness assertion0 an auditor should understand that such representations A. Complement0 but do not replace0 substantive procedures designed to support the assertion 3. Constitute suicient evidence to support the assertion #hen considered in combination #ith reliance on internal controls C. Are not part o the evidential matter considered to support the assertion . "eplace reliance on internal controls as evidence to support the assertion

%1. A #ritten representation rom a client*s management that0 among other matters0 ac+no#ledges responsibility or the air presentation o inancial statements should normally  be signed by the A. Chie executive oicer and the chie inancial oicer  3. Chie inancial oicer and the chairman o the board o directors C. Chairman o the audit committee o the board o directors . Chie executive oicer0 the chairman o the board o directors and the client*s la#yer 

%2. Communications bet#een the auditor and those charged #ith governance should include all o the ollo#ing except A. A summary o speciic audit procedures used 3. igniicant audit ad(ustments C. Consultations #ith other accountants . :a(or issues discussed #ith management beore the auditor #as retained

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Chapter 17 - Completing the Audit Engagement

%!. hich o the ollo#ing events occurring ater the issuance o a client*s inancial statements and the auditor*s report most li+ely #ould cause the auditor to ma+e urther in'uiries about the previously issued inancial statements A. An uninsured natural disaster occurs that may aect the entity*s ability to continue as a going concern 3. A contingency is resolved that had been disclosed in the audited inancial statements C. =e# inormation is discovered concerning undisclosed lease transactions in the audited  period . A subsidiary that accounts or 2% o the entity*s consolidated net income is sold

%$. >n February 2%0 a C4A issued an auditor*s report expressing an un'ualiied opinion on inancial statements or the year ended 6anuary !1. >n :arch 20 the C4A learned that0 on February 110 the entity incurred a material loss on an uncollectible trade receivable as a result o the ongoing deterioration o the inancial condition o the entity*s principal customer0 #hich inally led to the customer*s ban+ruptcy. :anag ement then reused to ad(ust the inancial statements or this subse'uent event. The C4A determined that the inormation is reliable and that there are creditors currently relying on the inancial statements. The C4A*s next course o action most li+ely #ould be to A. =otiy the entity*s creditors that the inancial statements and the related auditor*s report should no longer be relied upon 3. =otiy each member o the entity*s board o directors about management*s reusal to ad(ust the inancial statements C. &ssue revised inancial statements and distribute them to each creditor +n o#n to be relying on the inancial statements . &ssue a revised auditor*s report and distribute it to each creditor +no#n to be relying on the inancial statements

%%. Ater an audit report containing an un'ualiied opinion on a nonpublic client*s inancial statements is issued0 the auditor learns that the client has decided to sell the shares o a subsidiary that accounts or !/ percent o its revenu e and 2% percent o its net income. The auditor should A. etermine #hether the inormation is reliable and0 i it is determined to be reliable0 re'uest that revised inancial statements be issued 3. =otiy the entity that the auditor*s report may n o longer be associated #ith the inancial statements C. escribe the eects o this subse'uently discovered inormation in communications #ith  persons +no#n to be relying on the inancial statements . Ta+e no action because the auditor has no obligation to ma+e any urther in'uiries

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Chapter 17 - Completing the Audit Engagement

%). An auditor*s client has violated a minor re'uirement o its bond indenture #hich could result in the trustee re'uiring immediate payment o the principal amount due. The client reuses to see+ a #aiver rom the bond trustee. "e'uest or immediate payment is not considered li+ely. Dnder these circumstances the auditor must A. "e'uire classiication o bonds payable as a current liability 3. Contact the bond trustee directly C. isclose the situation in the auditor*s report . >btain an opinion rom the company*s attorney as to the li+elihood o the trustee*s enorcement o the re'uirement

%7. Auditors oten re'uest that the audit client send a letter o in'uiry to those attorneys #ho have been consulted #ith respect to litigation0 claims0 or assessments. The primary reason or this re'uest is to provide the auditor #ith A. An estimate o the dollar amount o the probable loss 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. &normation concerning the progress o cases to d ate . Corroborative in'uiries made o the client by the auditor 

%,. The primary reason an auditor re'uests letters o in'uiry be sent to a client*s attorneys is to  provide the auditor #ith A. A description and evaluation o litigation0 claims0 and assessments that existed at the date o the balance sheet 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. The opportunity to examine the documentation concerning litigation0 claims0 and assessments . Corroboration o the inormation urnished by management concerning litigation0 claims0 and assessments

%. hich o the ollo#ing statements extracted rom a client*s la#yer*s letter concerning litigation0 claims0 and assessments most li+ely #ould cause the auditor to re'uest clariication A. 9& believe that the possible liability to the co mpany is nominal in amount.9 3. 9& believe that the action can be settled or less than the damages claimed.9 C. 9& believe that the plainti*s case against the company is #ithout merit.9 . 9& believe that the company #ill be able to deend this action successully.9

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Chapter 17 - Completing the Audit Engagement

)/. An auditor*s decision concerning #hether or not to 9dual date9 the audit report is based upon the auditor*s #illingness to A. Extend auditing procedures 3. Accept responsibility or all events bet#een year-end and the audit report date C. 4ermit inclusion o a ootnote captioned@ event ;unaudited< subse'uent to the date o the auditor*s report . Assume responsibility or events subse'uent to the issuance o the auditor*s report

)1. A Type & subse'uent event usually re'uires@ A. An ad(ustment to the inancial statements 3. =o ad(ustment to the inancial statements C. ithdra#al rom the engagement . =one o the above

)2. A disclosure o a contingent liability in the ootnotes is made rather than ad(usting the inancial statement accounts #hen@ A. The outcome o the event is (udged to be reasonably possible and the loss can be reasonably estimated. 3. The loss can be reasonably estimated0 but the outcome is un+no#n. C. The outcome o the event is (udged to be reasonably possible but the loss cannot be reasonably estimated. . The outcome is un+no#n and the loss is reasonably estimable but the client does not #ant to boo+ the loss.

)!. hich o the ollo#ing statements ordinarily is included among the #ritten client representations obtained by the auditor A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed 3. :anagement ac+no#ledges responsibility or illegal actions committed by employees C. uicient evidential matter has been made available to permit the issuance o an un'ualiied opinion . :anagement ac+no#ledges that there are no material #ea+nesses in the account balances

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Chapter 17 - Completing the Audit Engagement

)$. hich o the ollo#ing statements is correct about an auditor*s re'uired communication #ith management and those charged #ith governance A. Any matters communicated to those charged #ith governance are also re'uired to be communicated to the entity*s management 3. The auditor is re'uired to inorm those ch arged #ith governance about signiicant errors discovered by the auditor and subse'uently corrected by management C. The auditor does not have any re'uirement to communicate #ith anyone outside o management . ea+nesses in internal control previously reported to those ch arged #ith governance are re'uired to be communicated to those charged #ith governance ater each subse'uent audit until the #ea+nesses are corrected

)%. hich o the ollo#ing statements is correct concerning an auditor*s re'uired communication #ith those charged #ith governance A. This communication is re'uired to occur beore the auditor*s report on the inancial statements is issued 3. This communication should include management changes in the application o signiicant accounting policies C. Any signiicant matter communicated to those charged #ith governance also should be communicated to management . igniicant audit ad(ustments proposed by the auditor and recorded by management need not be communicated to those charged #ith governance

)). For #hich o the ollo#ing matters should an auditor obtain #ritten management representations A. :anagement*s cost-beneit (ustiications or not correcting internal control #ea+nesses 3. :anagement*s +no#ledge o uture plans that may aect the price o the entity*s stoc+  C. :anagement*s compliance #ith contractual agreements that may aect the inancial statements . :anagement*s ac+no#ledgment o its responsibility or employees* violations o la#s

17-1)

Chapter 17 - Completing the Audit Engagement

)7. ey Co. plans to present comparative inancial statements or the years ended ecember !10 2//, and 2//0 respectively. mith0 C4A0 audited ey*s inancial statements or both years and plans to report on the comparative inancial statements on :ay 10 2 /1/. ey*s current management team #as not present until 6anuary 10 2//. hat period o time should  be covered by ey*s management representation letter A. 6anuary 10 2//, through ecember !10 2// 3. 6anuary 10 2//, through :ay 10 2/1/ C. 6anuary 10 2// through ecember !10 2// . 6anuary 10 2// through :ay 10 2/1/

),. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther in'uiries #ith respect to audited inancial statements covered by an auditor*s report unless A. A la#suit in #hich ris+ o loss #as considered remote is resolved in the company*s avor  3. A development occurs #hich may aect the client*s ability to continue as a going concern C. A material raud is initiated by an employee ater the report is issued . Evidence o signiicant0 non-arms-length0 related party transactions that happened prior to year-end is discovered

). Ater an auditor has issued an audit report on a nonpublic entity0 there is no obligation to ma+e any urther audit tests or in'uiries #ith respect to the audited inancial statements covered by that report unless A. =e# inormation comes to the auditor*s attention concerning an event that occurred prior to the date o the auditor*s report that may have aected the auditor*s report 3. :aterial adverse events occur ater the date o the auditor*s report C. Final determination or resolution #as made on matters that had resulted in a 'ualiication in the auditor*s report . Final determination or resolution #as made o a contingency that had been disclosed in the inancial statements and no liability arose rom the resolution

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Chapter 17 - Completing the Audit Engagement

7/. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther in'uiries #ith respect to audited inancial statements covered by that report unless A. A inal resolution o a contingency that had resulted in a 'ualiication o the auditor*s report is made 3. A development occurs that may aect the client*s ability to continue as a going concern C. An investigation o the auditor*s practice by a peer revie# committee ensues . =e# inormation is discovered concerning undisclosed related party transactions o the  previously audited period

71. ho generally signs the legal letter A. The board o directors 3. The audit partner  C. The CE> o the entity being audited . The entity*s attorneys

Short Answer Questions

72. A discrimination la#suit is pending or your client0 4retty 4eople &ncorporated. hat inormation about the la#suit #ould you as an auditor need to +no# to decide #hether to disclose the litigation in the inancial statements

7!. eine the term 9contingent liability9 and discuss the criteria used to classiy these events or conditions. 4rovide some example o contingent liabilities.

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Chapter 17 - Completing the Audit Engagement

7$. From the list belo#0 select the procedures that an auditor #ould use to test or contingent liabilities. a. &n'uire o EC oicials regarding reported violations by the client #hich create claims  b. "ead the client*s contracts0 loan agreements0 leases0 and other documents c. "ead the client*s minutes o meetings o shareholders0 directors0 and committees d. "e'uest a representation letter rom all the client*s employees e. "ead the legal bries o all suits iled against the client*s competitors . "e'uest the client*s management to prepare a letter o in'uiry to the client*s attorney regarding pending litigation against the client

7%. hile auditing other business processes0 an auditor may identiy inormation about contingent liabilities. hat speciic audit procedures relating to other business processes could uncover these liabilities

7). hat inormation is typically re'uested in a legal letter to a client*s attorney

17-1

Chapter 17 - Completing the Audit Engagement

77. hat is an unasserted claim and #hy #ould an attorney andBor client be reluctant to disclose an unasserted claim in the inancial statements

7,. hat is the dierence bet#een contingent liabilities and commitments

7. &dentiy the t#o primary types o subse'uent events that re'uire consideration by management and evaluation by the auditor and give t#o examples o each type.

,/. iscuss the steps used by an auditor to evaluate an entity*s ability to continue as a going concern.

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Chapter 17 - Completing the Audit Engagement

,1. iscuss the internal control communication re'uirements o the 4CA>3. hat must auditors o public companies report to those charged #ith governance

,2. tate the t#o primary purposes o the client letter o representation.

17-21

Chapter 17 - Completing the Audit Engagement

,!. The ield #or+ or the ecember !10 2// audit o 4ump+in Corporation ended on :arch 1!0 2/1/. The inancial statements and auditor*s report #ere issued and mailed to stoc+holders on :arch 2!0 2/1/. &n each o the situations belo#0 select rom the list at the end o the  problem the appropriate action to be ta+en by the auditor. Assume all situations are material. Situations: 1< >n April %0 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the entire uninsured inventory in one o 4ump+in*s #arehouses. 2< >n February 170 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the entire uninsured inventory in one o 4ump+in*s #arehouses. !< >n February 170 2/1/0 you discovered that on =ovember !/0 2//0 a lood destroyed the entire uninsured inventory in one o 4ump+in*s #arehouses. $< >n April %0 2/1/0 you discovered that on :arch !/0 2/1/0 a ire destroyed one o 4ump+in*s 1/ plants. %< >n April 70 2/1/0 you discovered that a debtor o 4ump+in #ent ban+rupt on 6anuary )0 2/1/. )< >n 6anuary 1)0 2/1/0 a la#suit #as iled against 4ump+in or a patent inringement action that allegedly too+ place in early 1. &n the opinion o 4ump+in*s attorneys0 there is a reasonable ;but not probable< danger o a signiicant loss to 4ump+in. 7< >n February 10 2/1/0 4ump+in settled a la#suit out o court that had originated in 1, and is currently listed as a contingent liability. Possile Actions: a. Ad(ust the ecember !10 2// inancial statements.  b. isclose the inormation in a ootnote in the ecember !10 2// inancial statements c. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The revision should involve an ad(ustment to the ecember !10 2// inancial statements. d. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The revision should involve the addition o a ootnote0 but no ad(ustment0 to the ecember !10 2// inancial statements. e. =o action is re'uired.

17-22

Chapter 17 - Completing the Audit Engagement

Chapter 17 Completing the Audit Engagement Ans#er ey

True / False Questions

1. Every contingent liability must be recorded. FA!SE

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: )

2. An example o a contingent liability is an income tax dispute. T"#E

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: )

!. "eading contracts and loan agreements is one #ay to identiy unrecorded contingent liabilities. T"#E

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: +

17-2!

Chapter 17 - Completing the Audit Engagement

$. A legal letter #ill include and evaluate all contingent liabilities o the company. FA!SE

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: ,

%. Type && subse'uent events are conditions that re'uire an ad(ustment to the account balance sho#n on the inancial statements. FA!SE

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: -

). An example o a Type & event or condition is the settlement o a la#suit ater the balance sheet date or an amount dierent rom the amount recorded in the year-end inancial statements. T"#E

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: -

17-2$

Chapter 17 - Completing the Audit Engagement

7. An example o a Type && event or condition is an uncollectible account receivable resulting rom continued deterioration o a customer*s inancial condition leading to ban+ruptcy ater the balance sheet date. FA!SE

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: -

,. ual dating is used to identiy unrecorded contingent liabilities. FA!SE

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: . 

. The auditor must perorm inal analytical procedures beore deciding on the appropriate audit report to issue or the entity. T"#E

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: /

17-2%

Chapter 17 - Completing the Audit Engagement

1/. & there is substantial doubt about the entity*s ability to continue as a going concern0 the auditor should obtain inormation about management*s plans to mitigate the problem and assess the li+elihood that such plans can be implemented. T"#E

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: 0

Multiple Choice Questions

11. hen auditing contingent liabilities0 #hich o the ollo#ing procedures #ould be least eective A. "eading the minutes o the board o directors 3. "evie#ing the ban+ conirmation letter  C$ Examining customer conirmation replies . Examining invoices or proessional services

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: +

12. hen obtaining evidence regarding litigation against a client0 the C4A #ould be least interested in determining A$ An estimate o #hen the matter #ill be resolved 3. The period in #hich the underlying cause o the litigation occurred C. The probability o an unavorable outcome . An estimate o the potential loss

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: +  $earning %&ecti(e: ,

17-2)

Chapter 17 - Completing the Audit Engagement

1!. The auditor*s primary means o obtaining corroboration o management*s inormation concerning litigation is a A$ 5etter o audit in'uiry to the client*s la#yer  3. 5etter o corroboration rom the auditor*s la#yer upon revie# o the legal documentation C. Conirmation o claims and assessments rom the other parties to the litigation . Conirmation o claims and assessments rom an oicer o the court presiding over the litigation

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +  $earning %&ecti(e: ,

1$. An auditor should obtain evidential matter relevant to all the ollo#ing actors concerning third-party litigation against a client except the A. 4eriod in #hich the underlying cause or legal action occurred 3. 4robability o an unavorable outcome C$ 6urisdiction in #hich the matter #ill be resolved . Existence o a situation indicating an uncertainty as to the possible loss

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: +  $earning %&ecti(e: ,

1%. An auditor #ill ordinarily examine invoices rom la#yers primarily in order to A. ubstantiate accruals 3. Assess the legal ramiications o litigation in progress C. Estimate the dollar amount o contingent liabilities %$ &dentiy possible unasserted litigation0 claims0 and assessments

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Com*rehension  Di!!icult": #as"  $earning %&ecti(e: +  $earning %&ecti(e: ,

17-27

Chapter 17 - Completing the Audit Engagement

1). & a la#yer reuses to urnish corroborating inormation regarding litigation0 claims0 and assessments0 the auditor should A. 8onor the conidentiality o the client-la#yer relationship &$ Consider the reusal to be a scope limitation C. ee+ to obtain the corroborating inormation rom management . isclose this act in a ootnote to the inancial statements

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: ,

17. The reusal o a client*s attorney to provide a representation on the legality o a particular act committed by the client is generally A. uicient reason to issue a 9sub(ect to9 'ualiied opinion &$ Considered to be a scope limitation C. &nsuicient reason to modiy the auditor*s report because o the attorney*s obligation o conidentiality . 4roper grounds to #ithdra# rom the engage ment #ithout urther consideration

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: ,

1,. hich o the ollo#ing material events occurring subse'uent to the balance sheet date #ould re'uire an ad(ustment to the inancial statements beore they could be issued A. ale o long-term debt or capital stoc+  3. 5oss o a plant as a result o a lood C. :a(or purchase o a business that is expected to double sales volume %$ ettlement o litigation0 in excess o the previously recorded liability

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: -

17-2,

Chapter 17 - Completing the Audit Engagement

1. hich o the ollo#ing situations #ould re'uire ad(ustment to o r disclosure in the inancial statements A. A merger discussion 3. The application or a patent on a ne# production process C. iscussions #ith a customer that could lead to a $/ percent increase in the client*s sales i agreement is successul %$ The ban+ruptcy o a customer #ho regularly purchased !/ percent o the company*s output

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: -

2/. An example o a Type 1 subse'uent event is A. A tornado that destroys a client*s actory ater the balance sheet date &$ An event ater the balance sheet date that conirms the auditor*s belie ;documented prior to the end o the client*s iscal year< that a large portion o the client*s inventory is obsolete C. =otiication o an &" audit ater the balance sheet date . The client*s 3oard o irectors unexpectedly resigns ater the balance sheet date

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Com*rehension  Di!!icult": #as"  $earning %&ecti(e: -

17-2

Chapter 17 - Completing the Audit Engagement

21. An auditor issued an audit report that #as dual dated or a subse'uent event that occurred ater the completion o ield #or+ but beore issuance o the auditor*s report. The auditor*s responsibility or events occurring subse'uent to the completion o ield #or+ #as A$ 5imited to the speciic event reerenced 3. 5imited to include only events occurring beore the date o the last subse'uent event reerenced C. Extended to subse'uent events occurring through the date o issuance o the report . Extended to include all events occurring since the completion o ield #or+ 

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Com*rehension  Di!!icult": #as"  $earning %&ecti(e: . 

22. hich o the ollo#ing procedures should an auditor generally perorm regarding subse'uent events A$ Compare the latest available interim inancial statements issued ater year-end #ith the inancial statements being audited 3. end second re'uests to the client*s customers #ho ailed to respond to initial accounts receivable conirmation re'uests C. Communicate material #ea+nesses in internal controls to those charged #ith governance . "evie# the cuto ban+ statements or several months ater year-end

 AACSB: Anal"tic  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: 2 

17-!/

Chapter 17 - Completing the Audit Engagement

2!. The purpose o analytical procedures at the completion o the audit includes all o the ollo#ing except A$ "evising the audit plan 3. Considering overall reasonableness o the inancial statements C. "evie#ing ade'uacy o evidence gathered to investigate unusual luctuations . "ecalculating some o the ratios examined during audit planning

 AACSB: Anal"tic  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Anal"sis  Di!!icult": #as"  $earning %&ecti(e: /

2$. hich o the ollo#ing auditing procedures is ordinarily perormed last A. Conirming accounts payable 3. Testing the purchasing unction C. "eading the minutes o directors* meetings %$ >btaining a management representation letter 

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: )3  $earning %&ecti(e: /

2%. The date o the management representation letter should coincide #ith the A. ate o the latest subse'uent event reerred to in the notes to the inancial statements 3. 3alance sheet date C$ ate o the auditor*s report . ate o the engagement agreement

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: /

17-!1

Chapter 17 - Completing the Audit Engagement

2). hich o the ollo#ing items should an auditor communicate to those charged #ith governance in a publicly-held entity A$ igniicant audit ad(ustments recorded by the en tity and management*s consultation #ith other accountants about signiicant accounting matters 3. igniicant audit ad(ustments recorded by the en tity but not management*s consultation #ith other accountants about signiicant accounting matters C. :anagement*s consultation #ith other accountants abou t signiicant accounting matters but not signiicant audit ad(ustments recorded by the entity . =either signiicant audit ad(ustments recorded by the entity nor management*s consultation #ith other accountants about signiicant accounting matters

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: )3

27. The management letter is used A. To allo# management to corroborate oral representations to the auditor  3. To conirm the terms o the audit engagement C. To list all reportable conditions #ith respect to internal controls %$ To ma+e recommendations to the client based on observations made during the audit

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: )3

17-!2

Chapter 17 - Completing the Audit Engagement

2,. A(ax0 &nc. is an ailiate o the audit client and is audited by another audit irm. hich o the ollo#ing is most li+ely to be used by the auditor to obtain assurance that all guarantees by the client o the ailiate*s indebtedness have been detected A. end the standard ban+ conirmation re'uest to all the client*s lender ban+s &$ "evie# client minutes and obtain a representation letter  C. Examine supporting documents or all entries in intercompany accounts . >btain #ritten conirmation o indebtedness rom the auditor o the ailiate

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +

2. ?enerally0 loss contingencies that are (udged to be remote@ A. hould be disclosed in the ootnotes 3. hould be recorded in the inancial statements C$ hould not be disclosed in the ootnotes . hould be recorded in the inancial statements and the ootnotes

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: )

17-!!

Chapter 17 - Completing the Audit Engagement

!/. hich o the ollo#ing procedures #ould an auditor most li+ely perorm to obtain evidence about an entity*s subse'uent events A. "econcile ban+ activity or the month ater the balance sheet date #ith cash activity relected in the accounting records &$ >btain a letter rom the entity*s attorney describing an y pending litigation0 unasserted claims0 or loss contingencies C. "evie# the treasurer*s monthly reports on temporary investments o#ned0 purchased0 and sold . Examine on a test basis the purchase invoices and receiving reports or several d ays ater the inventory date

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +  $earning %&ecti(e: ,

!1. hich o the ollo#ing procedures #ould an auditor ordinarily perorm during the revie# o subse'uent events A. An analysis o related party transactions or the discovery o  possible irregularities 3. A revie# o the cut-o ban+ statements or the period ater the year-end C$ An in'uiry o the client*s legal counsel concerning litigation . An investigation o material #ea+nesses in internal control previously communicated to the client

 AACSB: Anal"tic  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +  $earning %&ecti(e: -

17-!$

Chapter 17 - Completing the Audit Engagement

!2. hich o the ollo#ing is not  an audit procedure that the independent auditor #ould  perorm #ith respect to litigation0 claims and assessments A. &n'uire o and discuss #ith management the policies and procedures adopted or identiying0 evaluating0 and accounting or litigation0 claims0 and assessments 3. >btain rom management a description and evaluation o litigation0 claims0 and assessments that existed at the balance sheet date C. >btain assurance rom management that it has disclosed all unasserted claims that the la#yer has advised are li+ely to be asserted and must be disclosed %$ Conirm directly #ith the client*s la#yer that all claims have be en recorded in the inancial statements

 AACSB: Anal"tic  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +  $earning %&ecti(e: ,

!!. An attorney is responding to an independent auditor as a result o the audit client*s letter o in'uiry. The attorney may appropriately limit the response to A. Asserted claims and litigation &$ :atters to #hich the attorney has given substantive attention in the orm o legal consultation or representation C. Asserted0 overtly threatened0 or pending claims and litigation . &tems #hich have an extremely high probability o being resolved to the client*s detriment

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: +  $earning %&ecti(e: ,

17-!%

Chapter 17 - Completing the Audit Engagement

!$. hich o the ollo#ing is generally re'uested in a legal letter A$ A re'uest that the attorney comment on unasserted claims #here his or her vie#s dier rom management*s evaluation 3. A list o all attorneys that perormed any #or+ or the entity during the year  C. A statement indicating that the attorney is responsible or the air presentation o unasserted claims in the entity*s inancial statements . A re'uest that the attorney provide a copy o all invoices given to the client during the year 

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: ,

!%. hich o the ollo#ing subse'uent events #ill be least li+ely to result in an ad(ustment to the inancial statements A. Culmination o events aecting the realiation o accounts receivable o#ned as o the  balance sheet date 3. Culmination o events aecting the realiation o inventories o#ned as o the balance sheet date C. :aterial changes in the settlement o liabilities #hich #ere estimated as o the balance sheet date %$ :aterial changes in the 'uoted mar+et prices o listed investment securities since the  balance sheet date

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: -

17-!)

Chapter 17 - Completing the Audit Engagement

!). ubse'uent events or #hich the auditor has a responsibility to actively search are d eined as events #hich occur subse'uent to the A. 3alance sheet date 3. ate o the auditor*s report C$ 3alance sheet date but prior to the date o the auditor*s report . ate o the auditor*s report and concern contingencies #hich are not relected in the inancial statements

 AACSB: Communications  AICPA BB: $egal   AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: -

!7. An auditor is concerned #ith completing various phases o the examination ater the  balance sheet date. This 9subse'uent period9 involving ormal auditor procedures extends to the date o the A$ Auditor*s report 3. Final revie# o the audit #or+ing papers C. 4ublic issuance o the inancial statements . elivery o the auditor*s report to the client

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17-!7

Chapter 17 - Completing the Audit Engagement

!,. A ma(or customer o an audit client suers a ire ater year end0 but (ust prior to completion o audit ield #or+. The audit client believes that this event could have a signiicant direct eect on the inancial statements. The auditor should A$ Advise management to disclose the event in notes to the inancial statements 3. isclose the event in the auditor*s report C. ithhold submission o the auditor*s report until the extent o the direct eect on the inancial statements is +no#n . Advise management to ad(ust the inancial statements

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: -

!. & an auditor dates the auditor*s report on inancial statements or the year ended ecember !10 2//0 as o February 1/0 2/1/0 except or =ote 60 as to #hich the date is :arch !0 2/1/0 the auditor is ac+no#ledging responsibility to actively search or and ensure proper handling by management o A. All subse'uent events occurring through :arch !0 2/1/ 3. All subse'uent events occurring through February 1/0 2/1/ C$ All subse'uent events occurring through February 1/0 2/1/ and the speciic subse'uent event reerred to in =ote 6 through :arch !0 2/1/ . >nly the speciic subse'uent event reerred to in =ote 6 as o :arch !0 2/1/

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: . 

17-!,

Chapter 17 - Completing the Audit Engagement

$/. 8arvey0 C4A is preparing an audit program or the purpose o ascertaining the occurrence o subse'uent events that may re'uire ad(ustment or disclosure essential to a air presentation o the inancial statements in conormity #ith generally accepted accounting principles. hich one o the ollo#ing procedures #ould be least appropriate or this purpose A$ Conirm0 as o the completion o ield #or+0 accounts receivable that have increased signiicantly rom the year-end date 3. "ead the minutes o the board o directors C. &n'uire o management concerning events that may have occurred . >btain a la#yer*s letter as o the completion o ield #or+ 

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: 2 

$1. A Type && subse'uent event usually re'uires@ A. An ad(ustment to the inancial statements and the ootnotes 3. An ad(ustment to the inancial statements but no special disclosure is re'uired C$ isclosure in the ootnotes . =either an ad(ustment to the inancial statements nor d isclosure in the ootnotes

 AACSB: Anal"tic  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: -

17-!

Chapter 17 - Completing the Audit Engagement

$2. Ater ield #or+ audit procedures are completed0 a partner o the C4A irm #ho has not  been involved in the audit perorms a second or #rap-up revie# o the #or+ing papers. This second revie# usually ocuses on A$ The audit report0 inancial statements0 and ootnotes or consistency 3. &rregularities 3.  &rregularities involving the client*s management and its employees C. The C.  The materiality o the ad(usting entries proposed by the audit sta  . The .  The communication o internal control #ea+nesses #ea+n esses to those charged #ith governance

 AACSB: Communications Communications  AICPA BB: Inustr"  AICPA FN: 1isk Anal"sis  Bloom's: Knowlege Knowlege  Di!!icult": Moerate  $earning %&ecti(e: /

$!. &n the course o the examination o inancial statements or the purpose o expressing an opinion0 the auditor normally prepares a schedule o unad(usted dierences or #hich the auditor did not propose ad(ustments #hen they #ere discovered. hat is the primary purpose o this schedule A. To A.  To point out to the responsible client oicials the errors made by various company  personnel 3. To 3.  To summarie the ad(ustments that must be made beore the company can prepare and submit its ederal tax return C$ To identiy the potential inancial statement eects o errors or disputed items that #ere considered immaterial #hen discovered . To .  To summarie the errors made by the company so that corrections can be made ater the audited inancial statements are released

 AACSB: Communications Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: /

17-$/

Chapter 17 - Completing the Audit Engagement

$$. hich o the ollo#ing ratios is least li+ely to assist the auditor in determining #hether the client is experiencing inancial diiculties A. =et A.  =et #orthBtotal liabilities &$ CashBtotal assets C. Total C.  Total liabilitiesBtotal assets . =et .  =et income beore taxesBnet sales

 AACSB: Anal"tic  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: 0

$%. As part o an audit0 a C4A oten re'uests a representation letter rom the client. hich one o the ollo#ing is not a valid purpose o such a letter A. To A.  To provide audit evidence 3. To 3.  To emphasie to the client their responsibility or the airness o the inancial statements C$ To satisy himsel or hersel that a certain account balance is airly stated #hen certain customary auditing procedures are not perormed . To .  To provide possible protection to the C4A against a charge o +no#ledge +n o#ledge in cases #here raud is subse'uently discovered to have existed in the accounts

 AACSB: Communications Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: /

17-$1

Chapter 17 - Completing the Audit Engagement

$). hich o the ollo#ing expressions is least li+ely to be included in a client*s representation letter A. =o A.  =o events have occurred subse'uent to the balance sheet date that re'uire ad(ustment to or disclosure in0 the inancial statements 3. The 3.  The company has complied #ith all aspects o contractual agreements that #ould have a material eect on the inancial statements in the event o noncompliance C$ :anagement ac+no#ledges responsibility or illegal actions committed by its employees . :anagement .  :anagement has made available ava ilable all inancial statements and related data

 AACSB: Communications Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Com*rehension Com*rehension  Di!!icult": Moerate  $earning %&ecti(e: /

$7. 9There are no violations or possible violations o la#s or regulations #hose eects should  be considered or disclosure in the inancial statements or as a basis or recording a loss contingency.9 The oregoing passage most li+ely is rom a;an< A. Client A.  Client engagement letter  3. "eport 3.  "eport on compliance #ith la#s and regulations C$ :anagement representation letter  . Attestation .  Attestation report on internal controls

 AACSB: Communications Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Knowlege Knowlege  Di!!icult": Moerate  $earning %&ecti(e: /

17-$2

Chapter 17 - Completing the Audit Engagement

$,. hich o the ollo#ing matters is an auditor re'uired to communicate to those charged #ith governance A. The basis or assessing control ris+ belo# the maximum &$ The process used by management in ormulating sensitive accounting estimates C. The auditor*s preliminary (udgments about materiality levels . The (ustiication or perorming substantive procedures at interim dates

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: )3

$. 9There have been no communications rom regulatory agencies concerning noncompliance #ith or deiciencies in0 inancial reporting p ractices that could have a material eect on the inancial statements.9 The oregoing passage is most li+ely rom a A. "eport on internal control 3. pecial report C$ :anagement representation letter  . 5etter or under#riters

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: /

%/. hen considering the use o management*s #ritten representations as audit evidence about the completeness assertion0 an auditor should understand that such representations A$ Complement0 but do not replace0 substantive procedures designed to support the assertion 3. Constitute suicient evidence to support the assertion #hen considered in combination #ith reliance on internal controls C. Are not part o the evidential matter considered to support the assertion . "eplace reliance on internal controls as evidence to support the assertion

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: /

17-$!

Chapter 17 - Completing the Audit Engagement

%1. A #ritten representation rom a client*s management that0 among other matters0 ac+no#ledges responsibility or the air presentation o inancial statements should normally  be signed by the A$ Chie executive oicer and the chie inancial oicer  3. Chie inancial oicer and the chairman o the board o directors C. Chairman o the audit committee o the board o directors . Chie executive oicer0 the chairman o the board o directors and the client*s la#yer 

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: /

%2. Communications bet#een the auditor and those charged #ith governance should include all o the ollo#ing except A$ A summary o speciic audit procedures used 3. igniicant audit ad(ustments C. Consultations #ith other accountants . :a(or issues discussed #ith management beore the auditor #as retained

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: )3

17-$$

Chapter 17 - Completing the Audit Engagement

%!. hich o the ollo#ing events occurring ater the issuance o a client*s inancial statements and the auditor*s report most li+ely #ould cause the auditor to ma+e urther in'uiries about the previously issued inancial statements A. An uninsured natural disaster occurs that may aect the entity*s ability to continue as a going concern 3. A contingency is resolved that had been disclosed in the audited inancial statements C$ =e# inormation is discovered concerning undisclosed lease transactions in the audited  period . A subsidiary that accounts or 2% o the entity*s consolidated net income is sold

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: ))

%$. >n February 2%0 a C4A issued an auditor*s report expressing an un'ualiied opinion on inancial statements or the year ended 6anuary !1. >n :arch 20 the C4A learned that0 on February 110 the entity incurred a material loss on an uncollectible trade receivable as a result o the ongoing deterioration o the inancial condition o the entity*s principal customer0 #hich inally led to the customer*s ban+ruptcy. :anag ement then reused to ad(ust the inancial statements or this subse'uent event. The C4A determined that the inormation is reliable and that there are creditors currently relying on the inancial statements. The C4A*s next course o action most li+ely #ould be to A. =otiy the entity*s creditors that the inancial statements and the related auditor*s report should no longer be relied upon &$ =otiy each member o the entity*s board o directors about management*s reusal to ad(ust the inancial statements C. &ssue revised inancial statements and distribute them to each creditor +n o#n to be relying on the inancial statements . &ssue a revised auditor*s report and distribute it to each creditor +no#n to be relying on the inancial statements

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Anal"sis  Di!!icult": 4ar   $earning %&ecti(e: ))

17-

%$ Chapter 17 - Completing the Audit Engagement

%%. Ater an audit report containing an un'ualiied opinion on a nonpublic client*s inancial statements is issued0 the auditor learns that the client has decided to sell the shares o a subsidiary that accounts or !/ percent o its revenu e and 2% percent o its net income. The auditor should A. etermine #hether the inormation is reliable and0 i it is determined to be reliable0 re'uest that revised inancial statements be issued 3. =otiy the entity that the auditor*s report may n o longer be associated #ith the inancial statements C. escribe the eects o this subse'uently discovered inormation in communications #ith  persons +no#n to be relying on the inancial statements %$ Ta+e no action because the auditor has no obligation to ma+e any urther in'uiries

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: Anal"sis  Di!!icult": Moerate  $earning %&ecti(e: ))

%). An auditor*s client has violated a minor re'uirement o its bond indenture #hich could result in the trustee re'uiring immediate payment o the principal amount due. The client reuses to see+ a #aiver rom the bond trustee. "e'uest or immediate payment is not considered li+ely. Dnder these circumstances the auditor must A. "e'uire classiication o bonds payable as a current liability 3. Contact the bond trustee directly C$ isclose the situation in the auditor*s report . >btain an opinion rom the company*s attorney as to the li+elihood o the trustee*s enorcement o the re'uirement

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: +  $earning %&ecti(e: ,

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Chapter 17 - Completing the Audit Engagement

%7. Auditors oten re'uest that the audit client send a letter o in'uiry to those attorneys #ho have been consulted #ith respect to litigation0 claims0 or assessments. The primary reason or this re'uest is to provide the auditor #ith A. An estimate o the dollar amount o the probable loss 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. &normation concerning the progress o cases to d ate %$ Corroborative in'uiries made o the client by the auditor 

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": 4ar   $earning %&ecti(e: ,

%,. The primary reason an auditor re'uests letters o in'uiry be sent to a client*s attorneys is to  provide the auditor #ith A. A description and evaluation o litigation0 claims0 and assessments that existed at the date o the balance sheet 3. An expert opinion as to #hether a loss is possible0 probable0 or remote C. The opportunity to examine the documentation concerning litigation0 claims0 and assessments %$ Corroboration o the inormation urnished by management concerning litigation0 claims0 and assessments

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": 4ar   $earning %&ecti(e: ,

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Chapter 17 - Completing the Audit Engagement

%. hich o the ollo#ing statements extracted rom a client*s la#yer*s letter concerning litigation0 claims0 and assessments most li+ely #ould cause the auditor to re'uest clariication A. 9& believe that the possible liability to the co mpany is nominal in amount.9 &$ 9& believe that the action can be settled or less than the damages claimed.9 C. 9& believe that the plainti*s case against the company is #ithout merit.9 . 9& believe that the company #ill be able to deend this action successully.9

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: Decision Making   Bloom's: Anal"sis  Di!!icult": 4ar   $earning %&ecti(e: ,

)/. An auditor*s decision concerning #hether or not to 9dual date9 the audit report is based upon the auditor*s #illingness to A$ Extend auditing procedures 3. Accept responsibility or all events bet#een year-end and the audit report date C. 4ermit inclusion o a ootnote captioned@ event ;unaudited< subse'uent to the date o the auditor*s report . Assume responsibility or events subse'uent to the issuance o the auditor*s report

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: . 

)1. A Type & subse'uent event usually re'uires@ A$ An ad(ustment to the inancial statements 3. =o ad(ustment to the inancial statements C. ithdra#al rom the engagement . =one o the above

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: -

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Chapter 17 - Completing the Audit Engagement

)2. A disclosure o a contingent liability in the ootnotes is made rather than ad(usting the inancial statement accounts #hen@ A. The outcome o the event is (udged to be reasonably possible and the loss can be reasonably estimated. 3. The loss can be reasonably estimated0 but the outcome is un+no#n. C$ The outcome o the event is (udged to be reasonably possible but the loss cannot be reasonably estimated. . The outcome is un+no#n and the loss is reasonably estimable but the client does not #ant to boo+ the loss.

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: )

)!. hich o the ollo#ing statements ordinarily is included among the #ritten client representations obtained by the auditor A$ Compensating balances and other arrangements involving restrictions on cash balances have been disclosed 3. :anagement ac+no#ledges responsibility or illegal actions committed by employees C. uicient evidential matter has been made available to permit the issuance o an un'ualiied opinion . :anagement ac+no#ledges that there are no material #ea+nesses in the account balances

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": 4ar   $earning %&ecti(e: /

17-$

Chapter 17 - Completing the Audit Engagement

)$. hich o the ollo#ing statements is correct about an auditor*s re'uired communication #ith management and those charged #ith governance A. Any matters communicated to those charged #ith governance are also re'uired to be communicated to the entity*s management &$ The auditor is re'uired to inorm those charged #ith governance about signiicant errors discovered by the auditor and subse'uently corrected by management C. The auditor does not have any re'uirement to communicate #ith anyone outside o management . ea+nesses in internal control previously reported to those ch arged #ith governance are re'uired to be communicated to those charged #ith governance ater each subse'uent audit until the #ea+nesses are corrected

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": 4ar   $earning %&ecti(e: )3

)%. hich o the ollo#ing statements is correct concerning an auditor*s re'uired communication #ith those charged #ith governance A. This communication is re'uired to occur beore the auditor*s report on the inancial statements is issued &$ This communication should include management changes in the application o signiicant accounting policies C. Any signiicant matter communicated to those charged #ith governance also should be communicated to management . igniicant audit ad(ustments proposed by the auditor and recorded by management need not be communicated to those charged #ith governance

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: )3

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Chapter 17 - Completing the Audit Engagement

)). For #hich o the ollo#ing matters should an auditor obtain #ritten management representations A. :anagement*s cost-beneit (ustiications or not correcting internal control #ea+nesses 3. :anagement*s +no#ledge o uture plans that may aect the price o the entity*s stoc+  C$ :anagement*s compliance #ith contractual agreements that may aect the inancial statements . :anagement*s ac+no#ledgment o its responsibility or employees* violations o la#s

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Decision Making   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: /

)7. ey Co. plans to present comparative inancial statements or the years ended ecember !10 2//, and 2//0 respectively. mith0 C4A0 audited ey*s inancial statements or both years and plans to report on the comparative inancial statements on :ay 10 2 /1/. ey*s current management team #as not present until 6anuary 10 2//. hat period o time should  be covered by ey*s management representation letter A. 6anuary 10 2//, through ecember !10 2// &$ 6anuary 10 2//, through :ay 10 2/1/ C. 6anuary 10 2// through ecember !10 2// . 6anuary 10 2// through :ay 10 2/1/

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: 2 

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Chapter 17 - Completing the Audit Engagement

),. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther in'uiries #ith respect to audited inancial statements covered by an auditor*s report unless A. A la#suit in #hich ris+ o loss #as considered remote is resolved in the company*s avor  3. A development occurs #hich may aect the client*s ability to continue as a going concern C. A material raud is initiated by an employee ater the report is issued %$ Evidence o signiicant0 non-arms-length0 related party transactions that happened prior to year-end is discovered

 AACSB: Communications  AICPA BB: $egal   AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: ))

). Ater an auditor has issued an audit report on a nonpublic entity0 there is no obligation to ma+e any urther audit tests or in'uiries #ith respect to the audited inancial statements covered by that report unless A$ =e# inormation comes to the auditor*s attention concerning an event that occurred prior to the date o the auditor*s report that may have aected the auditor*s report 3. :aterial adverse events occur ater the date o the auditor*s report C. Final determination or resolution #as made on matters that had resulted in a 'ualiication in the auditor*s report . Final determination or resolution #as made o a contingency that had been disclosed in the inancial statements and no liability arose rom the resolution

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: ))

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Chapter 17 - Completing the Audit Engagement

7/. Ater issuance o the auditor*s report0 the auditor has no obligation to ma+e any urther in'uiries #ith respect to audited inancial statements covered by that report unless A. A inal resolution o a contingency that had resulted in a 'ualiication o the auditor*s report is made 3. A development occurs that may aect the client*s ability to continue as a going concern C. An investigation o the auditor*s practice by a peer revie# committee ensues %$ =e# inormation is discovered concerning undisclosed related party transactions o the  previously audited period

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: ))

71. ho generally signs the legal letter A. The board o directors 3. The audit partner  C$ The CE> o the entity being audited . The entity*s attorneys

 AACSB: Anal"tic  AICPA BB: Critical Thinking   AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: ,

Short Answer Questions

17-%!

Chapter 17 - Completing the Audit Engagement

72. A discrimination la#suit is pending or your client0 4retty 4eople &ncorporated. hat inormation about the la#suit #ould you as an auditor need to +no# to decide #hether to disclose the litigation in the inancial statements & a negative outcome o the la#suit is probable and the amount o the contingency can be estimated0 the amount #ill have to be charged to income and appear as a liability in the inancial statements. & the event has a reasonably possible chance o having a negative outcome or the amount cannot be estimated0 the contingency should be disclosed in the ootnotes o the inancial statements. =o disclosure is necessary or contingencies the li+elihood o occurrence or #hich is remote.

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": #as"  $earning %&ecti(e: )

17-%$

Chapter 17 - Completing the Audit Engagement

7!. eine the term 9contingent liability9 and discuss the criteria used to classiy these events or conditions. 4rovide some example o contingent liabilities. A contingent liability is deined as an existing condition0 situation0 or set o circumstances involving uncertainty as the possible loss to an en tity that #ill ultimately be resolved #hen some uture event occurs or ails to occur. FA3 AC Topic $%/0 9Contingencies09 states that #hen a contingent liability exists0 the li+elihood that the uture event #ill result in a loss or impairment o an asset or the incurrence o a liability can be classiied into three categories@ 4robable. The uture event is li+ely to occur. & the event is probable and the amount o the loss can be reasonably estimated0 the loss is accrued by a charge to income. "easonably possible. The chance o the uture event occurring is more than remote but less than li+ely. hen the outcome o the event is (udged to be reasonably possible or the amount cannot be estimated0 a disclosure o the contingency is made in the ootnotes to the inancial statements. "emote. The chance o the uture event occurring is slight. &n general0 loss contingencies that are (udged to be remote are not disclosed in the ootnotes. Examples o contingent liabilities include@ pending or threatened litigation0 actual or possible claims and assessments0 income tax disputes0 product #arranties or deects0 guarantees o obligations to others0 and agreements to repurchase receivables that have been sold.

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: )

17-%%

Chapter 17 - Completing the Audit Engagement

7$. From the list belo#0 select the procedures that an auditor #ould use to test or contingent liabilities. a. &n'uire o EC oicials regarding reported violations by the client #hich create claims  b. "ead the client*s contracts0 loan agreements0 leases0 and other documents c. "ead the client*s minutes o meetings o shareholders0 directors0 and committees d. "e'uest a representation letter rom all the client*s employees e. "ead the legal bries o all suits iled against the client*s competitors . "e'uest the client*s management to prepare a letter o in'uiry to the client*s attorney regarding pending litigation against the client  b0 c and  are procedures typically used by auditors to test or contingent liabilities.

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +

7%. hile auditing other business processes0 an auditor may identiy inormation about contingent liabilities. hat speciic audit procedures relating to other business processes could uncover these liabilities  "eading the minutes o the board o directors and committees o the bo ard and stoc+holders • "evie#ing contracts0 loan agreements0 leases0 and correspondence rom government agencies • "evie#ing income tax liability0 tax returns0 and &" agents* reports • Conirming or other#ise documenting guarantees and letters o credit obtained rom inancial institutions or other lending agencies • &nspecting other documents or possible guarantees •

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: A**lication  Di!!icult": Moerate  $earning %&ecti(e: +

17-%)

Chapter 17 - Completing the Audit Engagement

7). hat inormation is typically re'uested in a legal letter to a client*s attorney  A list and evaluation o any pending or threatened litigation to #hich the attorney has devoted substantial attention • A list o unasserted claims and assessments considered by management to be probable o assertion and reasonably possible o unavorable outcome • A description and evaluation o the outcome o each pending or threatened litigation • Additions to the list provided by management or a statement that the list is complete • Comment on unasserted claims #here his or her vie#s dier rom management*s evaluation •

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: ,

77. hat is an unasserted claim and #hy #ould an attorney andBor client be reluctant to disclose an unasserted claim in the inancial statements An unasserted claim is one in #hich the in(ured party or potential claimant has not yet notiied the entity o a possible claim. The attorney may be reluctant to provide inormation on such claims due to client-attorney privilege. Also0 b oth the client and the attorney may be concerned that disclosing the unasserted claims could lead to the claims actually occurring.

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: 1e*orting   Bloom's: Com*rehension  Di!!icult": #as"  $earning %&ecti(e: ,

17-%7

Chapter 17 - Completing the Audit Engagement

7,. hat is the dierence bet#een contingent liabilities and commitments Contingent liabilities are an existing condition0 situation0 or set o circumstances involving uncertainty as to possible loss to an entity that #ill ultimately be resolved by some uture event. A commitment is an agreement made by the entity to a set o ixed conditions. The conditions in a commitment are speciied in advance .

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: )  $earning %&ecti(e: 5

7. &dentiy the t#o primary types o subse'uent events that re'uire consideration by management and evaluation by the auditor and give t#o examples o each type.  Events that provide additional evidence about conditions that existed at the date o the  balance sheet and aect the estimates that are part o the inancial statement preparation  process ;Type & events<. Examples include declaration o ban+ruptcy by a customer #ith an outstanding accounts receivable balance ;the deterioration existed at the balance sheet date< and the settlement o litigation at an amount dierent rom the amount already recorded on the boo+s. • Events that provide evidence about conditions that did not exist at the date o the balance sheet but arose subse'uent to that date ;Type && events<. Examples include a decline in the mar+et value o securities held or temporary investment or resale during the subse'uent  period and loss due to natural disaster ater the balance sheet date. •

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: -

,/. iscuss the steps used by an auditor to evaluate an entity*s ability to continue as a going concern.

17-%,

Chapter 17 - Completing the Audit Engagement

Auditing standards ;AD !$1< indicate that the auditor has a responsibility to evaluate #hether there is substantial doubt about an entity*s ability to continue as a going concern or a reasonable period o time ;deined as one year beyond the date o the inancial statements  being audited<. The auditor should ollo# three overall steps in ma+ing the going-concern evaluation@ tep 1. Consider #hether the results o audit procedu res perormed during the planning0  perormance0 and completion o the audit indicate #hether there is substantial doubt about the entity*s ability to continue as a going concern or a reasonable period o time ;one year<. tep 2. & there is substantial doubt0 the auditor should obtain inormation about management*s  plan to mitigate the going concern problem and assess the li+elihood that such plans can be implemented. tep !. & the auditor concludes0 ater evaluating management*s plans0 that there is substantial doubt about the ability o the entity to continue as a going concern0 he or she should consider the ade'uacy o the disclosures about the entity*s ability to continue and include an explanatory paragraph in the audit report. Auditing standards identiy our ma(or categories o conditions or events@ negative inancial trends0 other inancial diiculties0 internal problem0 and external matters.

 AACSB: Communications  AICPA BB: Inustr"  AICPA FN: Measurement   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: 0

,1. iscuss the internal control communication re'uirements o the 4CA>3. hat must auditors o public companies report to those charged #ith governance The items to be communicated are organied into three categories@ the auditor*s responsibilities under generally accepted auditing standards0 an overvie# o the planned scope and timing o the audit0 and signiicant indings rom the audit. ;ee Table 17-$ or speciic details o items to be communicated.<

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": Moerate  $earning %&ecti(e: )3

17-%

Chapter 17 - Completing the Audit Engagement

,2. tate the t#o primary purposes o the client letter o representation.  To corroborate oral representations made to the auditor and to document the continued appropriateness o such representations • To reduce the possibility o misunderstanding concerning management*s responses to the auditor*s in'uiries •

 AACSB: Communications  AICPA BB: Critical Thinking   AICPA FN: 1e*orting   Bloom's: Knowlege  Di!!icult": #as"  $earning %&ecti(e: /

,!. The ield #or+ or the ecember !10 2// audit o 4ump+in Corporation ended on :arch 1!0 2/1/. The inancial statements and auditor*s report #ere issued and mailed to stoc+holders on :arch 2!0 2/1/. &n each o the situations belo#0 select rom the list at the end o the  problem the appropriate action to be ta+en by the auditor. Assume all situations are material. Situations: 1< >n April %0 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the entire uninsured inventory in one o 4ump+in*s #arehouses. 2< >n February 170 2/1/0 you discovered that on February 1)0 2/1/0 a lood destroyed the entire uninsured inventory in one o 4ump+in*s #arehouses. !< >n February 170 2/1/0 you discovered that on =ovember !/0 2//0 a lood destroyed the entire uninsured inventory in one o 4ump+in*s #arehouses. $< >n April %0 2/1/0 you discovered that on :arch !/0 2/1/0 a ire destroyed one o 4ump+in*s 1/ plants. %< >n April 70 2/1/0 you discovered that a debtor o 4ump+in #ent ban+rupt on 6anuary )0 2/1/. )< >n 6anuary 1)0 2/1/0 a la#suit #as iled against 4ump+in or a patent inringement action that allegedly too+ place in early 1. &n the opinion o 4ump+in*s attorneys0 there is a reasonable ;but not probable< danger o a signiicant loss to 4ump+in. 7< >n February 10 2/1/0 4ump+in settled a la#suit out o court that had originated in 1, and is currently listed as a contingent liability.

17-)/

Chapter 17 - Completing the Audit Engagement

Possile Actions: a. Ad(ust the ecember !10 2// inancial statements.  b. isclose the inormation in a ootnote in the ecember !10 2// inancial statements c. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The revision should involve an ad(ustment to the ecember !10 2// inancial statements. d. "e'uest the client revise and reissue the ecember !10 2// inancial statements. The revision should involve the addition o a ootnote0 but no ad(ustment0 to the ecember !10 2// inancial statements. e. =o action is re'uired.

1. d 2. b !. a $. e %. c ). b 7. a

 AACSB: Communications  AICPA BB: $egal   AICPA FN: 1e*orting   Bloom's: A**lication  Di!!icult": 4ar   $earning %&ecti(e: ))  $earning %&ecti(e: -

17-)1

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