Chapter17CompletingtheAuditEngagement
1.Everycontingentliabilitymustberecorded.
FALSE
AACSB:Communications
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AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:1
MessierChapter17#1
2.Anexampleofacontingentliabilityisanincometaxdispute.
TRUE
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:1
MessierChapter17#2
3.Readingcontractsandloanagreementsisonewaytoidentifyunrecordedcontingentliabilities.
TRUE
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Easy
LearningObjective:2
MessierChapter17#3
4.Alegalletterwillincludeandevaluateallcontingentliabilitiesofthecompany.
FALSE
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:3
MessierChapter17#4
5.TypeIIsubsequenteventsareconditionsthatrequireanadjustmenttotheaccountbalanceshownonthe
financialstatements.
FALSE
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AICPABB:CriticalThinking
AICPAFN:DecisionMaking
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Difficulty:Easy
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MessierChapter17#5
6.AnexampleofaTypeIeventorconditionisthesettlementofalawsuitafterthebalancesheetdateforan
amountdifferentfromtheamountrecordedintheyearendfinancialstatements.
TRUE
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:5
MessierChapter17#6
7.AnexampleofaTypeIIeventorconditionisanuncollectibleaccountreceivableresultingfromcontinued
deteriorationofacustomer'sfinancialconditionleadingtobankruptcyafterthebalancesheetdate.
FALSE
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Knowledge
Difficulty:Easy
LearningObjective:5
MessierChapter17#7
8.Dualdatingisusedtoidentifyunrecordedcontingentliabilities.
FALSE
AACSB:Communications
AICPABB:CriticalThinking
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Blooms:Knowledge
Difficulty:Easy
LearningObjective:6
MessierChapter17#8
9.Theauditormustperformfinalanalyticalproceduresbeforedecidingontheappropriateauditreporttoissue
fortheentity.
TRUE
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Blooms:Application
Difficulty:Easy
LearningObjective:8
MessierChapter17#9
10.Ifthereissubstantialdoubtabouttheentity'sabilitytocontinueasagoingconcern,theauditorshould
obtaininformationaboutmanagement'splanstomitigatetheproblemandassessthelikelihoodthatsuchplans
canbeimplemented.
TRUE
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LearningObjective:9
MessierChapter17#10
11.Whenauditingcontingentliabilities,whichofthefollowingprocedureswouldbeleasteffective?
A.Readingtheminutesoftheboardofdirectors
B.Reviewingthebankconfirmationletter
C.Examiningcustomerconfirmationreplies
D.Examininginvoicesforprofessionalservices
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MessierChapter17#11
12.Whenobtainingevidenceregardinglitigationagainstaclient,theCPAwouldbeleastinterestedin
determining
A.Anestimateofwhenthematterwillberesolved
B.Theperiodinwhichtheunderlyingcauseofthelitigationoccurred
C.Theprobabilityofanunfavorableoutcome
D.Anestimateofthepotentialloss
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Analysis
Difficulty:Moderate
LearningObjective:2
LearningObjective:3
MessierChapter17#12
13.Theauditor'sprimarymeansofobtainingcorroborationofmanagement'sinformationconcerninglitigation
isa
A.Letterofauditinquirytotheclient'slawyer
B.Letterofcorroborationfromtheauditor'slawyeruponreviewofthelegaldocumentation
C.Confirmationofclaimsandassessmentsfromtheotherpartiestothelitigation
D.Confirmationofclaimsandassessmentsfromanofficerofthecourtpresidingoverthelitigation
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MessierChapter17#13
14.Anauditorshouldobtainevidentialmatterrelevanttoallthefollowingfactorsconcerningthirdparty
litigationagainstaclientexceptthe
A.Periodinwhichtheunderlyingcauseforlegalactionoccurred
B.Probabilityofanunfavorableoutcome
C.Jurisdictioninwhichthematterwillberesolved
D.Existenceofasituationindicatinganuncertaintyastothepossibleloss
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Application
Difficulty:Easy
LearningObjective:2
LearningObjective:3
MessierChapter17#14
15.Anauditorwillordinarilyexamineinvoicesfromlawyersprimarilyinorderto
A.Substantiateaccruals
B.Assessthelegalramificationsoflitigationinprogress
C.Estimatethedollaramountofcontingentliabilities
D.Identifypossibleunassertedlitigation,claims,andassessments
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Comprehension
Difficulty:Easy
LearningObjective:2
LearningObjective:3
MessierChapter17#15
16.Ifalawyerrefusestofurnishcorroboratinginformationregardinglitigation,claims,andassessments,the
auditorshould
A.Honortheconfidentialityoftheclientlawyerrelationship
B.Considertherefusaltobeascopelimitation
C.Seektoobtainthecorroboratinginformationfrommanagement
D.Disclosethisfactinafootnotetothefinancialstatements
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AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Moderate
LearningObjective:3
MessierChapter17#16
17.Therefusalofaclient'sattorneytoprovidearepresentationonthelegalityofaparticularactcommittedby
theclientisgenerally
A.Sufficientreasontoissuea"subjectto"qualifiedopinion
B.Consideredtobeascopelimitation
C.Insufficientreasontomodifytheauditor'sreportbecauseoftheattorney'sobligationofconfidentiality
D.Propergroundstowithdrawfromtheengagementwithoutfurtherconsideration
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AICPAFN:Reporting
Blooms:Application
Difficulty:Easy
LearningObjective:3
MessierChapter17#17
18.Whichofthefollowingmaterialeventsoccurringsubsequenttothebalancesheetdatewouldrequirean
adjustmenttothefinancialstatementsbeforetheycouldbeissued?
A.Saleoflongtermdebtorcapitalstock
B.Lossofaplantasaresultofaflood
C.Majorpurchaseofabusinessthatisexpectedtodoublesalesvolume
D.Settlementoflitigation,inexcessofthepreviouslyrecordedliability
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MessierChapter17#18
19.Whichofthefollowingsituationswouldrequireadjustmenttoordisclosureinthefinancialstatements?
A.Amergerdiscussion
B.Theapplicationforapatentonanewproductionprocess
C.Discussionswithacustomerthatcouldleadtoa40percentincreaseintheclient'ssalesifagreementis
successful
D.Thebankruptcyofacustomerwhoregularlypurchased30percentofthecompany'soutput
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Difficulty:Easy
LearningObjective:5
MessierChapter17#19
20.AnexampleofaType1subsequenteventis
A.Atornadothatdestroysaclient'sfactoryafterthebalancesheetdate
B.Aneventafterthebalancesheetdatethatconfirmstheauditor'sbelief(documentedpriortotheendofthe
client'sfiscalyear)thatalargeportionoftheclient'sinventoryisobsolete
C.NotificationofanIRSauditafterthebalancesheetdate
D.Theclient'sBoardofDirectorsunexpectedlyresignsafterthebalancesheetdate
AACSB:Communications
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MessierChapter17#20
21.Anauditorissuedanauditreportthatwasdualdatedforasubsequenteventthatoccurredafterthe
completionoffieldworkbutbeforeissuanceoftheauditor'sreport.Theauditor'sresponsibilityforevents
occurringsubsequenttothecompletionoffieldworkwas
A.Limitedtothespecificeventreferenced
B.Limitedtoincludeonlyeventsoccurringbeforethedateofthelastsubsequenteventreferenced
C.Extendedtosubsequenteventsoccurringthroughthedateofissuanceofthereport
D.Extendedtoincludealleventsoccurringsincethecompletionoffieldwork
AACSB:Communications
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AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:6
MessierChapter17#21
22.Whichofthefollowingproceduresshouldanauditorgenerallyperformregardingsubsequentevents?
A.Comparethelatestavailableinterimfinancialstatementsissuedafteryearendwiththefinancialstatements
beingaudited
B.Sendsecondrequeststotheclient'scustomerswhofailedtorespondtoinitialaccountsreceivable
confirmationrequests
C.Communicatematerialweaknessesininternalcontrolstothosechargedwithgovernance
D.Reviewthecutoffbankstatementsforseveralmonthsafteryearend
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MessierChapter17#22
23.Thepurposeofanalyticalproceduresatthecompletionoftheauditincludesallofthefollowingexcept
A.Revisingtheauditplan
B.Consideringoverallreasonablenessofthefinancialstatements
C.Reviewingadequacyofevidencegatheredtoinvestigateunusualfluctuations
D.Recalculatingsomeoftheratiosexaminedduringauditplanning
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AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Analysis
Difficulty:Easy
LearningObjective:8
MessierChapter17#23
24.Whichofthefollowingauditingproceduresisordinarilyperformedlast?
A.Confirmingaccountspayable
B.Testingthepurchasingfunction
C.Readingtheminutesofdirectors'meetings
D.Obtainingamanagementrepresentationletter
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Application
Difficulty:Easy
LearningObjective:10
LearningObjective:8
MessierChapter17#24
25.Thedateofthemanagementrepresentationlettershouldcoincidewiththe
A.Dateofthelatestsubsequenteventreferredtointhenotestothefinancialstatements
B.Balancesheetdate
C.Dateoftheauditor'sreport
D.Dateoftheengagementagreement
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Easy
LearningObjective:8
MessierChapter17#25
26.Whichofthefollowingitemsshouldanauditorcommunicatetothosechargedwithgovernanceina
publiclyheldentity?
A.Significantauditadjustmentsrecordedbytheentityandmanagement'sconsultationwithotheraccountants
aboutsignificantaccountingmatters
B.Significantauditadjustmentsrecordedbytheentitybutnotmanagement'sconsultationwithother
accountantsaboutsignificantaccountingmatters
C.Management'sconsultationwithotheraccountantsaboutsignificantaccountingmattersbutnotsignificant
auditadjustmentsrecordedbytheentity
D.Neithersignificantauditadjustmentsrecordedbytheentitynormanagement'sconsultationwithother
accountantsaboutsignificantaccountingmatters
AACSB:Communications
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Blooms:Knowledge
Difficulty:Moderate
LearningObjective:10
MessierChapter17#26
27.Themanagementletterisused
A.Toallowmanagementtocorroborateoralrepresentationstotheauditor
B.Toconfirmthetermsoftheauditengagement
C.Tolistallreportableconditionswithrespecttointernalcontrols
D.Tomakerecommendationstotheclientbasedonobservationsmadeduringtheaudit
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AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:10
MessierChapter17#27
10
28.Ajax,Inc.isanaffiliateoftheauditclientandisauditedbyanotherauditfirm.Whichofthefollowingis
mostlikelytobeusedbytheauditortoobtainassurancethatallguaranteesbytheclientoftheaffiliate's
indebtednesshavebeendetected?
A.Sendthestandardbankconfirmationrequesttoalltheclient'slenderbanks
B.Reviewclientminutesandobtainarepresentationletter
C.Examinesupportingdocumentsforallentriesinintercompanyaccounts
D.Obtainwrittenconfirmationofindebtednessfromtheauditoroftheaffiliate
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AICPABB:Industry
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Difficulty:Moderate
LearningObjective:2
MessierChapter17#28
29.Generally,losscontingenciesthatarejudgedtoberemote:
A.Shouldbedisclosedinthefootnotes
B.Shouldberecordedinthefinancialstatements
C.Shouldnotbedisclosedinthefootnotes
D.Shouldberecordedinthefinancialstatementsandthefootnotes
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Application
Difficulty:Easy
LearningObjective:1
MessierChapter17#29
11
30.Whichofthefollowingprocedureswouldanauditormostlikelyperformtoobtainevidenceaboutan
entity'ssubsequentevents?
A.Reconcilebankactivityforthemonthafterthebalancesheetdatewithcashactivityreflectedinthe
accountingrecords
B.Obtainaletterfromtheentity'sattorneydescribinganypendinglitigation,unassertedclaims,orloss
contingencies
C.Reviewthetreasurer'smonthlyreportsontemporaryinvestmentsowned,purchased,andsold
D.Examineonatestbasisthepurchaseinvoicesandreceivingreportsforseveraldaysaftertheinventorydate
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MessierChapter17#30
31.Whichofthefollowingprocedureswouldanauditorordinarilyperformduringthereviewofsubsequent
events?
A.Ananalysisofrelatedpartytransactionsforthediscoveryofpossibleirregularities
B.Areviewofthecutoffbankstatementsfortheperiodaftertheyearend
C.Aninquiryoftheclient'slegalcounselconcerninglitigation
D.Aninvestigationofmaterialweaknessesininternalcontrolpreviouslycommunicatedtotheclient
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LearningObjective:2
LearningObjective:5
MessierChapter17#31
12
32.Whichofthefollowingisnotanauditprocedurethattheindependentauditorwouldperformwithrespectto
litigation,claimsandassessments?
A.Inquireofanddiscusswithmanagementthepoliciesandproceduresadoptedforidentifying,evaluating,and
accountingforlitigation,claims,andassessments
B.Obtainfrommanagementadescriptionandevaluationoflitigation,claims,andassessmentsthatexistedat
thebalancesheetdate
C.Obtainassurancefrommanagementthatithasdisclosedallunassertedclaimsthatthelawyerhasadvisedare
likelytobeassertedandmustbedisclosed
D.Confirmdirectlywiththeclient'slawyerthatallclaimshavebeenrecordedinthefinancialstatements
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MessierChapter17#32
33.Anattorneyisrespondingtoanindependentauditorasaresultoftheauditclient'sletterofinquiry.The
attorneymayappropriatelylimittheresponseto
A.Assertedclaimsandlitigation
B.Matterstowhichtheattorneyhasgivensubstantiveattentionintheformoflegalconsultationor
representation
C.Asserted,overtlythreatened,orpendingclaimsandlitigation
D.Itemswhichhaveanextremelyhighprobabilityofbeingresolvedtotheclient'sdetriment
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:2
LearningObjective:3
MessierChapter17#33
13
34.Whichofthefollowingisgenerallyrequestedinalegalletter?
A.Arequestthattheattorneycommentonunassertedclaimswherehisorherviewsdifferfrommanagement's
evaluation
B.Alistofallattorneysthatperformedanyworkfortheentityduringtheyear
C.Astatementindicatingthattheattorneyisresponsibleforthefairpresentationofunassertedclaimsinthe
entity'sfinancialstatements
D.Arequestthattheattorneyprovideacopyofallinvoicesgiventotheclientduringtheyear
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AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:3
MessierChapter17#34
35.Whichofthefollowingsubsequenteventswillbeleastlikelytoresultinanadjustmenttothefinancial
statements?
A.Culminationofeventsaffectingtherealizationofaccountsreceivableownedasofthebalancesheetdate
B.Culminationofeventsaffectingtherealizationofinventoriesownedasofthebalancesheetdate
C.Materialchangesinthesettlementofliabilitieswhichwereestimatedasofthebalancesheetdate
D.Materialchangesinthequotedmarketpricesoflistedinvestmentsecuritiessincethebalancesheetdate
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AICPAFN:Reporting
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Difficulty:Moderate
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MessierChapter17#35
14
36.Subsequenteventsforwhichtheauditorhasaresponsibilitytoactivelysearcharedefinedaseventswhich
occursubsequenttothe
A.Balancesheetdate
B.Dateoftheauditor'sreport
C.Balancesheetdatebutpriortothedateoftheauditor'sreport
D.Dateoftheauditor'sreportandconcerncontingencieswhicharenotreflectedinthefinancialstatements
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Difficulty:Moderate
LearningObjective:5
MessierChapter17#36
37.Anauditorisconcernedwithcompletingvariousphasesoftheexaminationafterthebalancesheetdate.
This"subsequentperiod"involvingformalauditorproceduresextendstothedateofthe
A.Auditor'sreport
B.Finalreviewoftheauditworkingpapers
C.Publicissuanceofthefinancialstatements
D.Deliveryoftheauditor'sreporttotheclient
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:5
MessierChapter17#37
15
38.Amajorcustomerofanauditclientsuffersafireafteryearend,butjustpriortocompletionofauditfield
work.Theauditclientbelievesthatthiseventcouldhaveasignificantdirecteffectonthefinancialstatements.
Theauditorshould
A.Advisemanagementtodisclosetheeventinnotestothefinancialstatements
B.Disclosetheeventintheauditor'sreport
C.Withholdsubmissionoftheauditor'sreportuntiltheextentofthedirecteffectonthefinancialstatementsis
known
D.Advisemanagementtoadjustthefinancialstatements
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Analysis
Difficulty:Moderate
LearningObjective:5
MessierChapter17#38
39.Ifanauditordatestheauditor'sreportonfinancialstatementsfortheyearendedDecember31,2009,asof
February10,2010,exceptforNoteJ,astowhichthedateisMarch3,2010,theauditorisacknowledging
responsibilitytoactivelysearchforandensureproperhandlingbymanagementof
A.AllsubsequenteventsoccurringthroughMarch3,2010
B.AllsubsequenteventsoccurringthroughFebruary10,2010
C.AllsubsequenteventsoccurringthroughFebruary10,2010andthespecificsubsequenteventreferredtoin
NoteJthroughMarch3,2010
D.OnlythespecificsubsequenteventreferredtoinNoteJasofMarch3,2010
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MessierChapter17#39
16
40.Harvey,CPAispreparinganauditprogramforthepurposeofascertainingtheoccurrenceofsubsequent
eventsthatmayrequireadjustmentordisclosureessentialtoafairpresentationofthefinancialstatementsin
conformitywithgenerallyacceptedaccountingprinciples.Whichoneofthefollowingprocedureswouldbe
leastappropriateforthispurpose?
A.Confirm,asofthecompletionoffieldwork,accountsreceivablethathaveincreasedsignificantlyfromthe
yearenddate
B.Readtheminutesoftheboardofdirectors
C.Inquireofmanagementconcerningeventsthatmayhaveoccurred
D.Obtainalawyer'sletterasofthecompletionoffieldwork
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
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LearningObjective:7
MessierChapter17#40
41.ATypeIIsubsequenteventusuallyrequires:
A.Anadjustmenttothefinancialstatementsandthefootnotes
B.Anadjustmenttothefinancialstatementsbutnospecialdisclosureisrequired
C.Disclosureinthefootnotes
D.Neitheranadjustmenttothefinancialstatementsnordisclosureinthefootnotes
AACSB:Analytic
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Moderate
LearningObjective:5
MessierChapter17#41
17
42.Afterfieldworkauditproceduresarecompleted,apartneroftheCPAfirmwhohasnotbeeninvolvedinthe
auditperformsasecondorwrapupreviewoftheworkingpapers.Thissecondreviewusuallyfocuseson
A.Theauditreport,financialstatements,andfootnotesforconsistency
B.Irregularitiesinvolvingtheclient'smanagementanditsemployees
C.Thematerialityoftheadjustingentriesproposedbytheauditstaff
D.Thecommunicationofinternalcontrolweaknessestothosechargedwithgovernance
AACSB:Communications
AICPABB:Industry
AICPAFN:RiskAnalysis
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:8
MessierChapter17#42
43.Inthecourseoftheexaminationoffinancialstatementsforthepurposeofexpressinganopinion,theauditor
normallypreparesascheduleofunadjusteddifferencesforwhichtheauditordidnotproposeadjustmentswhen
theywerediscovered.Whatistheprimarypurposeofthisschedule?
A.Topointouttotheresponsibleclientofficialstheerrorsmadebyvariouscompanypersonnel
B.Tosummarizetheadjustmentsthatmustbemadebeforethecompanycanprepareandsubmititsfederaltax
return
C.Toidentifythepotentialfinancialstatementeffectsoferrorsordisputeditemsthatwereconsidered
immaterialwhendiscovered
D.Tosummarizetheerrorsmadebythecompanysothatcorrectionscanbemadeaftertheauditedfinancial
statementsarereleased
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Analysis
Difficulty:Moderate
LearningObjective:8
MessierChapter17#43
18
44.Whichofthefollowingratiosisleastlikelytoassisttheauditorindeterminingwhethertheclientis
experiencingfinancialdifficulties?
A.Networth/totalliabilities
B.Cash/totalassets
C.Totalliabilities/totalassets
D.Netincomebeforetaxes/netsales
AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Analysis
Difficulty:Moderate
LearningObjective:9
MessierChapter17#44
45.Aspartofanaudit,aCPAoftenrequestsarepresentationletterfromtheclient.Whichoneofthefollowing
isnotavalidpurposeofsuchaletter?
A.Toprovideauditevidence
B.Toemphasizetotheclienttheirresponsibilityforthefairnessofthefinancialstatements
C.Tosatisfyhimselforherselfthatacertainaccountbalanceisfairlystatedwhencertaincustomaryauditing
proceduresarenotperformed
D.ToprovidepossibleprotectiontotheCPAagainstachargeofknowledgeincaseswherefraudis
subsequentlydiscoveredtohaveexistedintheaccounts
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Analysis
Difficulty:Moderate
LearningObjective:8
MessierChapter17#45
19
46.Whichofthefollowingexpressionsisleastlikelytobeincludedinaclient'srepresentationletter?
A.Noeventshaveoccurredsubsequenttothebalancesheetdatethatrequireadjustmenttoordisclosurein,the
financialstatements
B.Thecompanyhascompliedwithallaspectsofcontractualagreementsthatwouldhaveamaterialeffecton
thefinancialstatementsintheeventofnoncompliance
C.Managementacknowledgesresponsibilityforillegalactionscommittedbyitsemployees
D.Managementhasmadeavailableallfinancialstatementsandrelateddata
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Moderate
LearningObjective:8
MessierChapter17#46
47."Therearenoviolationsorpossibleviolationsoflawsorregulationswhoseeffectsshouldbeconsideredfor
disclosureinthefinancialstatementsorasabasisforrecordingalosscontingency."Theforegoingpassage
mostlikelyisfroma(an)
A.Clientengagementletter
B.Reportoncompliancewithlawsandregulations
C.Managementrepresentationletter
D.Attestationreportoninternalcontrols
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:8
MessierChapter17#47
20
48.Whichofthefollowingmattersisanauditorrequiredtocommunicatetothosechargedwithgovernance?
A.Thebasisforassessingcontrolriskbelowthemaximum
B.Theprocessusedbymanagementinformulatingsensitiveaccountingestimates
C.Theauditor'spreliminaryjudgmentsaboutmaterialitylevels
D.Thejustificationforperformingsubstantiveproceduresatinterimdates
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:10
MessierChapter17#48
49."Therehavebeennocommunicationsfromregulatoryagenciesconcerningnoncompliancewithor
deficienciesin,financialreportingpracticesthatcouldhaveamaterialeffectonthefinancialstatements."The
foregoingpassageismostlikelyfroma
A.Reportoninternalcontrol
B.Specialreport
C.Managementrepresentationletter
D.Letterforunderwriters
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:8
MessierChapter17#49
21
50.Whenconsideringtheuseofmanagement'swrittenrepresentationsasauditevidenceaboutthecompleteness
assertion,anauditorshouldunderstandthatsuchrepresentations
A.Complement,butdonotreplace,substantiveproceduresdesignedtosupporttheassertion
B.Constitutesufficientevidencetosupporttheassertionwhenconsideredincombinationwithrelianceon
internalcontrols
C.Arenotpartoftheevidentialmatterconsideredtosupporttheassertion
D.Replacerelianceoninternalcontrolsasevidencetosupporttheassertion
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Analysis
Difficulty:Moderate
LearningObjective:8
MessierChapter17#50
51.Awrittenrepresentationfromaclient'smanagementthat,amongothermatters,acknowledgesresponsibility
forthefairpresentationoffinancialstatementsshouldnormallybesignedbythe
A.Chiefexecutiveofficerandthechieffinancialofficer
B.Chieffinancialofficerandthechairmanoftheboardofdirectors
C.Chairmanoftheauditcommitteeoftheboardofdirectors
D.Chiefexecutiveofficer,thechairmanoftheboardofdirectorsandtheclient'slawyer
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Application
Difficulty:Moderate
LearningObjective:8
MessierChapter17#51
22
52.Communicationsbetweentheauditorandthosechargedwithgovernanceshouldincludeallofthefollowing
except
A.Asummaryofspecificauditproceduresused
B.Significantauditadjustments
C.Consultationswithotheraccountants
D.Majorissuesdiscussedwithmanagementbeforetheauditorwasretained
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:10
MessierChapter17#52
53.Whichofthefollowingeventsoccurringaftertheissuanceofaclient'sfinancialstatementsandtheauditor's
reportmostlikelywouldcausetheauditortomakefurtherinquiriesaboutthepreviouslyissuedfinancial
statements?
A.Anuninsurednaturaldisasteroccursthatmayaffecttheentity'sabilitytocontinueasagoingconcern
B.Acontingencyisresolvedthathadbeendisclosedintheauditedfinancialstatements
C.Newinformationisdiscoveredconcerningundisclosedleasetransactionsintheauditedperiod
D.Asubsidiarythataccountsfor25%oftheentity'sconsolidatednetincomeissold
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Application
Difficulty:Moderate
LearningObjective:11
MessierChapter17#53
23
54.OnFebruary25,aCPAissuedanauditor'sreportexpressinganunqualifiedopiniononfinancialstatements
fortheyearendedJanuary31.OnMarch2,theCPAlearnedthat,onFebruary11,theentityincurredamaterial
lossonanuncollectibletradereceivableasaresultoftheongoingdeteriorationofthefinancialconditionofthe
entity'sprincipalcustomer,whichfinallyledtothecustomer'sbankruptcy.Managementthenrefusedtoadjust
thefinancialstatementsforthissubsequentevent.TheCPAdeterminedthattheinformationisreliableandthat
therearecreditorscurrentlyrelyingonthefinancialstatements.TheCPA'snextcourseofactionmostlikely
wouldbeto
A.Notifytheentity'screditorsthatthefinancialstatementsandtherelatedauditor'sreportshouldnolongerbe
reliedupon
B.Notifyeachmemberoftheentity'sboardofdirectorsaboutmanagement'srefusaltoadjustthefinancial
statements
C.Issuerevisedfinancialstatementsanddistributethemtoeachcreditorknowntoberelyingonthefinancial
statements
D.Issuearevisedauditor'sreportanddistributeittoeachcreditorknowntoberelyingonthefinancial
statements
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Analysis
Difficulty:Hard
LearningObjective:11
MessierChapter17#54
55.Afteranauditreportcontaininganunqualifiedopiniononanonpublicclient'sfinancialstatementsisissued,
theauditorlearnsthattheclienthasdecidedtosellthesharesofasubsidiarythataccountsfor30percentofits
revenueand25percentofitsnetincome.Theauditorshould
A.Determinewhethertheinformationisreliableand,ifitisdeterminedtobereliable,requestthatrevised
financialstatementsbeissued
B.Notifytheentitythattheauditor'sreportmaynolongerbeassociatedwiththefinancialstatements
C.Describetheeffectsofthissubsequentlydiscoveredinformationincommunicationswithpersonsknownto
berelyingonthefinancialstatements
D.Takenoactionbecausetheauditorhasnoobligationtomakeanyfurtherinquiries
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Analysis
Difficulty:Moderate
LearningObjective:11
MessierChapter17#55
24
56.Anauditor'sclienthasviolatedaminorrequirementofitsbondindenturewhichcouldresultinthetrustee
requiringimmediatepaymentoftheprincipalamountdue.Theclientrefusestoseekawaiverfromthebond
trustee.Requestforimmediatepaymentisnotconsideredlikely.Underthesecircumstancestheauditormust
A.Requireclassificationofbondspayableasacurrentliability
B.Contactthebondtrusteedirectly
C.Disclosethesituationintheauditor'sreport
D.Obtainanopinionfromthecompany'sattorneyastothelikelihoodofthetrustee'senforcementofthe
requirement
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:2
LearningObjective:3
MessierChapter17#56
57.Auditorsoftenrequestthattheauditclientsendaletterofinquirytothoseattorneyswhohavebeen
consultedwithrespecttolitigation,claims,orassessments.Theprimaryreasonforthisrequestistoprovidethe
auditorwith
A.Anestimateofthedollaramountoftheprobableloss
B.Anexpertopinionastowhetheralossispossible,probable,orremote
C.Informationconcerningtheprogressofcasestodate
D.Corroborativeinquiriesmadeoftheclientbytheauditor
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Hard
LearningObjective:3
MessierChapter17#57
25
58.Theprimaryreasonanauditorrequestslettersofinquirybesenttoaclient'sattorneysistoprovidethe
auditorwith
A.Adescriptionandevaluationoflitigation,claims,andassessmentsthatexistedatthedateofthebalance
sheet
B.Anexpertopinionastowhetheralossispossible,probable,orremote
C.Theopportunitytoexaminethedocumentationconcerninglitigation,claims,andassessments
D.Corroborationoftheinformationfurnishedbymanagementconcerninglitigation,claims,andassessments
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Hard
LearningObjective:3
MessierChapter17#58
59.Whichofthefollowingstatementsextractedfromaclient'slawyer'sletterconcerninglitigation,claims,and
assessmentsmostlikelywouldcausetheauditortorequestclarification?
A."Ibelievethatthepossibleliabilitytothecompanyisnominalinamount."
B."Ibelievethattheactioncanbesettledforlessthanthedamagesclaimed."
C."Ibelievethattheplaintiff'scaseagainstthecompanyiswithoutmerit."
D."Ibelievethatthecompanywillbeabletodefendthisactionsuccessfully."
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:DecisionMaking
Blooms:Analysis
Difficulty:Hard
LearningObjective:3
MessierChapter17#59
26
60.Anauditor'sdecisionconcerningwhetherornotto"dualdate"theauditreportisbasedupontheauditor's
willingnessto
A.Extendauditingprocedures
B.Acceptresponsibilityforalleventsbetweenyearendandtheauditreportdate
C.Permitinclusionofafootnotecaptioned:event(unaudited)subsequenttothedateoftheauditor'sreport
D.Assumeresponsibilityforeventssubsequenttotheissuanceoftheauditor'sreport
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:6
MessierChapter17#60
61.ATypeIsubsequenteventusuallyrequires:
A.Anadjustmenttothefinancialstatements
B.Noadjustmenttothefinancialstatements
C.Withdrawalfromtheengagement
D.Noneoftheabove
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:5
MessierChapter17#61
62.Adisclosureofacontingentliabilityinthefootnotesismaderatherthanadjustingthefinancialstatement
accountswhen:
A.Theoutcomeoftheeventisjudgedtobereasonablypossibleandthelosscanbereasonablyestimated.
B.Thelosscanbereasonablyestimated,buttheoutcomeisunknown.
C.Theoutcomeoftheeventisjudgedtobereasonablypossiblebutthelosscannotbereasonablyestimated.
D.Theoutcomeisunknownandthelossisreasonablyestimablebuttheclientdoesnotwanttobooktheloss.
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Application
Difficulty:Easy
LearningObjective:1
MessierChapter17#62
27
63.Whichofthefollowingstatementsordinarilyisincludedamongthewrittenclientrepresentationsobtained
bytheauditor?
A.Compensatingbalancesandotherarrangementsinvolvingrestrictionsoncashbalanceshavebeendisclosed
B.Managementacknowledgesresponsibilityforillegalactionscommittedbyemployees
C.Sufficientevidentialmatterhasbeenmadeavailabletopermittheissuanceofanunqualifiedopinion
D.Managementacknowledgesthattherearenomaterialweaknessesintheaccountbalances
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Hard
LearningObjective:8
MessierChapter17#63
64.Whichofthefollowingstatementsiscorrectaboutanauditor'srequiredcommunicationwithmanagement
andthosechargedwithgovernance?
A.Anymatterscommunicatedtothosechargedwithgovernancearealsorequiredtobecommunicatedtothe
entity'smanagement
B.Theauditorisrequiredtoinformthosechargedwithgovernanceaboutsignificanterrorsdiscoveredbythe
auditorandsubsequentlycorrectedbymanagement
C.Theauditordoesnothaveanyrequirementtocommunicatewithanyoneoutsideofmanagement
D.Weaknessesininternalcontrolpreviouslyreportedtothosechargedwithgovernancearerequiredtobe
communicatedtothosechargedwithgovernanceaftereachsubsequentaudituntiltheweaknessesarecorrected
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Hard
LearningObjective:10
MessierChapter17#64
28
65.Whichofthefollowingstatementsiscorrectconcerninganauditor'srequiredcommunicationwiththose
chargedwithgovernance?
A.Thiscommunicationisrequiredtooccurbeforetheauditor'sreportonthefinancialstatementsisissued
B.Thiscommunicationshouldincludemanagementchangesintheapplicationofsignificantaccounting
policies
C.Anysignificantmattercommunicatedtothosechargedwithgovernancealsoshouldbecommunicatedto
management
D.Significantauditadjustmentsproposedbytheauditorandrecordedbymanagementneednotbe
communicatedtothosechargedwithgovernance
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:10
MessierChapter17#65
66.Forwhichofthefollowingmattersshouldanauditorobtainwrittenmanagementrepresentations?
A.Management'scostbenefitjustificationsfornotcorrectinginternalcontrolweaknesses
B.Management'sknowledgeoffutureplansthatmayaffectthepriceoftheentity'sstock
C.Management'scompliancewithcontractualagreementsthatmayaffectthefinancialstatements
D.Management'sacknowledgmentofitsresponsibilityforemployees'violationsoflaws
AACSB:Communications
AICPABB:Industry
AICPAFN:DecisionMaking
Blooms:Application
Difficulty:Hard
LearningObjective:8
MessierChapter17#66
29
67.KeyCo.planstopresentcomparativefinancialstatementsfortheyearsendedDecember31,2008and2009,
respectively.Smith,CPA,auditedKey'sfinancialstatementsforbothyearsandplanstoreportonthe
comparativefinancialstatementsonMay1,2010.Key'scurrentmanagementteamwasnotpresentuntil
January1,2009.WhatperiodoftimeshouldbecoveredbyKey'smanagementrepresentationletter?
A.January1,2008throughDecember31,2009
B.January1,2008throughMay1,2010
C.January1,2009throughDecember31,2009
D.January1,2009throughMay1,2010
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:7
MessierChapter17#67
68.Afterissuanceoftheauditor'sreport,theauditorhasnoobligationtomakeanyfurtherinquirieswithrespect
toauditedfinancialstatementscoveredbyanauditor'sreportunless
A.Alawsuitinwhichriskoflosswasconsideredremoteisresolvedinthecompany'sfavor
B.Adevelopmentoccurswhichmayaffecttheclient'sabilitytocontinueasagoingconcern
C.Amaterialfraudisinitiatedbyanemployeeafterthereportisissued
D.Evidenceofsignificant,nonarmslength,relatedpartytransactionsthathappenedpriortoyearendis
discovered
AACSB:Communications
AICPABB:Legal
AICPAFN:Measurement
Blooms:Application
Difficulty:Hard
LearningObjective:11
MessierChapter17#68
30
69.Afteranauditorhasissuedanauditreportonanonpublicentity,thereisnoobligationtomakeanyfurther
audittestsorinquirieswithrespecttotheauditedfinancialstatementscoveredbythatreportunless
A.Newinformationcomestotheauditor'sattentionconcerninganeventthatoccurredpriortothedateofthe
auditor'sreportthatmayhaveaffectedtheauditor'sreport
B.Materialadverseeventsoccurafterthedateoftheauditor'sreport
C.Finaldeterminationorresolutionwasmadeonmattersthathadresultedinaqualificationintheauditor's
report
D.Finaldeterminationorresolutionwasmadeofacontingencythathadbeendisclosedinthefinancial
statementsandnoliabilityarosefromtheresolution
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:11
MessierChapter17#69
70.Afterissuanceoftheauditor'sreport,theauditorhasnoobligationtomakeanyfurtherinquirieswithrespect
toauditedfinancialstatementscoveredbythatreportunless
A.Afinalresolutionofacontingencythathadresultedinaqualificationoftheauditor'sreportismade
B.Adevelopmentoccursthatmayaffecttheclient'sabilitytocontinueasagoingconcern
C.Aninvestigationoftheauditor'spracticebyapeerreviewcommitteeensues
D.Newinformationisdiscoveredconcerningundisclosedrelatedpartytransactionsofthepreviouslyaudited
period
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:11
MessierChapter17#70
31
71.Whogenerallysignsthelegalletter?
A.Theboardofdirectors
B.Theauditpartner
C.TheCEOoftheentitybeingaudited
D.Theentity'sattorneys
AACSB:Analytic
AICPABB:CriticalThinking
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:3
MessierChapter17#71
72.Adiscriminationlawsuitispendingforyourclient,PrettyPeopleIncorporated.Whatinformationaboutthe
lawsuitwouldyouasanauditorneedtoknowtodecidewhethertodisclosethelitigationinthefinancial
statements?
Ifanegativeoutcomeofthelawsuitisprobableandtheamountofthecontingencycanbeestimated,the
amountwillhavetobechargedtoincomeandappearasaliabilityinthefinancialstatements.Iftheeventhasa
reasonablypossiblechanceofhavinganegativeoutcomeortheamountcannotbeestimated,thecontingency
shouldbedisclosedinthefootnotesofthefinancialstatements.Nodisclosureisnecessaryforcontingenciesthe
likelihoodofoccurrenceforwhichisremote.
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Application
Difficulty:Easy
LearningObjective:1
MessierChapter17#72
32
73.Definetheterm"contingentliability"anddiscussthecriteriausedtoclassifytheseeventsorconditions.
Providesomeexampleofcontingentliabilities.
Acontingentliabilityisdefinedasanexistingcondition,situation,orsetofcircumstancesinvolvinguncertainty
asthepossiblelosstoanentitythatwillultimatelyberesolvedwhensomefutureeventoccursorfailstooccur.
FASBASCTopic450,"Contingencies,"statesthatwhenacontingentliabilityexists,thelikelihoodthatthe
futureeventwillresultinalossorimpairmentofanassetortheincurrenceofaliabilitycanbeclassifiedinto
threecategories:
Probable.Thefutureeventislikelytooccur.Iftheeventisprobableandtheamountofthelosscanbe
reasonablyestimated,thelossisaccruedbyachargetoincome.
Reasonablypossible.Thechanceofthefutureeventoccurringismorethanremotebutlessthanlikely.When
theoutcomeoftheeventisjudgedtobereasonablypossibleortheamountcannotbeestimated,adisclosureof
thecontingencyismadeinthefootnotestothefinancialstatements.
Remote.Thechanceofthefutureeventoccurringisslight.Ingeneral,losscontingenciesthatarejudgedtobe
remotearenotdisclosedinthefootnotes.
Examplesofcontingentliabilitiesinclude:pendingorthreatenedlitigation,actualorpossibleclaimsand
assessments,incometaxdisputes,productwarrantiesordefects,guaranteesofobligationstoothers,and
agreementstorepurchasereceivablesthathavebeensold.
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:1
MessierChapter17#73
33
74.Fromthelistbelow,selecttheproceduresthatanauditorwouldusetotestforcontingentliabilities.
a.InquireofSECofficialsregardingreportedviolationsbytheclientwhichcreateclaims
b.Readtheclient'scontracts,loanagreements,leases,andotherdocuments
c.Readtheclient'sminutesofmeetingsofshareholders,directors,andcommittees
d.Requestarepresentationletterfromalltheclient'semployees
e.Readthelegalbriefsofallsuitsfiledagainsttheclient'scompetitors
f.Requesttheclient'smanagementtopreparealetterofinquirytotheclient'sattorneyregardingpending
litigationagainsttheclient
b,candfareprocedurestypicallyusedbyauditorstotestforcontingentliabilities.
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Application
Difficulty:Moderate
LearningObjective:2
MessierChapter17#74
75.Whileauditingotherbusinessprocesses,anauditormayidentifyinformationaboutcontingentliabilities.
Whatspecificauditproceduresrelatingtootherbusinessprocessescoulduncovertheseliabilities?
Readingtheminutesoftheboardofdirectorsandcommitteesoftheboardandstockholders
Reviewingcontracts,loanagreements,leases,andcorrespondencefromgovernmentagencies
Reviewingincometaxliability,taxreturns,andIRSagents'reports
Confirmingorotherwisedocumentingguaranteesandlettersofcreditobtainedfromfinancialinstitutionsor
otherlendingagencies
Inspectingotherdocumentsforpossibleguarantees
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Application
Difficulty:Moderate
LearningObjective:2
MessierChapter17#75
34
76.Whatinformationistypicallyrequestedinalegallettertoaclient'sattorney?
Alistandevaluationofanypendingorthreatenedlitigationtowhichtheattorneyhasdevotedsubstantial
attention
Alistofunassertedclaimsandassessmentsconsideredbymanagementtobeprobableofassertionand
reasonablypossibleofunfavorableoutcome
Adescriptionandevaluationoftheoutcomeofeachpendingorthreatenedlitigation
Additionstothelistprovidedbymanagementorastatementthatthelistiscomplete
Commentonunassertedclaimswherehisorherviewsdifferfrommanagement'sevaluation
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:3
MessierChapter17#76
77.Whatisanunassertedclaimandwhywouldanattorneyand/orclientbereluctanttodiscloseanunasserted
claiminthefinancialstatements?
Anunassertedclaimisoneinwhichtheinjuredpartyorpotentialclaimanthasnotyetnotifiedtheentityofa
possibleclaim.Theattorneymaybereluctanttoprovideinformationonsuchclaimsduetoclientattorney
privilege.Also,boththeclientandtheattorneymaybeconcernedthatdisclosingtheunassertedclaimscould
leadtotheclaimsactuallyoccurring.
AACSB:Communications
AICPABB:Industry
AICPAFN:Reporting
Blooms:Comprehension
Difficulty:Easy
LearningObjective:3
MessierChapter17#77
35
78.Whatisthedifferencebetweencontingentliabilitiesandcommitments?
Contingentliabilitiesareanexistingcondition,situation,orsetofcircumstancesinvolvinguncertaintyasto
possiblelosstoanentitythatwillultimatelyberesolvedbysomefutureevent.Acommitmentisanagreement
madebytheentitytoasetoffixedconditions.Theconditionsinacommitmentarespecifiedinadvance.
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Easy
LearningObjective:1
LearningObjective:4
MessierChapter17#78
79.Identifythetwoprimarytypesofsubsequenteventsthatrequireconsiderationbymanagementand
evaluationbytheauditorandgivetwoexamplesofeachtype.
Eventsthatprovideadditionalevidenceaboutconditionsthatexistedatthedateofthebalancesheetandaffect
theestimatesthatarepartofthefinancialstatementpreparationprocess(TypeIevents).Examplesinclude
declarationofbankruptcybyacustomerwithanoutstandingaccountsreceivablebalance(thedeterioration
existedatthebalancesheetdate)andthesettlementoflitigationatanamountdifferentfromtheamountalready
recordedonthebooks.
Eventsthatprovideevidenceaboutconditionsthatdidnotexistatthedateofthebalancesheetbutarose
subsequenttothatdate(TypeIIevents).Examplesincludeadeclineinthemarketvalueofsecuritiesheldfor
temporaryinvestmentorresaleduringthesubsequentperiodandlossduetonaturaldisasterafterthebalance
sheetdate.
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:5
MessierChapter17#79
36
80.Discussthestepsusedbyanauditortoevaluateanentity'sabilitytocontinueasagoingconcern.
Auditingstandards(AU341)indicatethattheauditorhasaresponsibilitytoevaluatewhetherthereis
substantialdoubtaboutanentity'sabilitytocontinueasagoingconcernforareasonableperiodoftime(defined
asoneyearbeyondthedateofthefinancialstatementsbeingaudited).Theauditorshouldfollowthreeoverall
stepsinmakingthegoingconcernevaluation:
Step1.Considerwhethertheresultsofauditproceduresperformedduringtheplanning,performance,and
completionoftheauditindicatewhetherthereissubstantialdoubtabouttheentity'sabilitytocontinueasa
goingconcernforareasonableperiodoftime(oneyear).
Step2.Ifthereissubstantialdoubt,theauditorshouldobtaininformationaboutmanagement'splantomitigate
thegoingconcernproblemandassessthelikelihoodthatsuchplanscanbeimplemented.
Step3.Iftheauditorconcludes,afterevaluatingmanagement'splans,thatthereissubstantialdoubtaboutthe
abilityoftheentitytocontinueasagoingconcern,heorsheshouldconsidertheadequacyofthedisclosures
abouttheentity'sabilitytocontinueandincludeanexplanatoryparagraphintheauditreport.
Auditingstandardsidentifyfourmajorcategoriesofconditionsorevents:negativefinancialtrends,other
financialdifficulties,internalproblem,andexternalmatters.
AACSB:Communications
AICPABB:Industry
AICPAFN:Measurement
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:9
MessierChapter17#80
81.DiscusstheinternalcontrolcommunicationrequirementsofthePCAOB.Whatmustauditorsofpublic
companiesreporttothosechargedwithgovernance?
Theitemstobecommunicatedareorganizedintothreecategories:theauditor'sresponsibilitiesundergenerally
acceptedauditingstandards,anoverviewoftheplannedscopeandtimingoftheaudit,andsignificantfindings
fromtheaudit.(SeeTable174forspecificdetailsofitemstobecommunicated.)
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Moderate
LearningObjective:10
MessierChapter17#81
37
82.Statethetwoprimarypurposesoftheclientletterofrepresentation.
Tocorroborateoralrepresentationsmadetotheauditorandtodocumentthecontinuedappropriatenessof
suchrepresentations
Toreducethepossibilityofmisunderstandingconcerningmanagement'sresponsestotheauditor'sinquiries
AACSB:Communications
AICPABB:CriticalThinking
AICPAFN:Reporting
Blooms:Knowledge
Difficulty:Easy
LearningObjective:8
MessierChapter17#82
38
83.ThefieldworkfortheDecember31,2009auditofPumpkinCorporationendedonMarch13,2010.The
financialstatementsandauditor'sreportwereissuedandmailedtostockholdersonMarch23,2010.Ineachof
thesituationsbelow,selectfromthelistattheendoftheproblemtheappropriateactiontobetakenbythe
auditor.Assumeallsituationsarematerial.
Situations:
1)OnApril5,2010,youdiscoveredthatonFebruary16,2010,aflooddestroyedtheentireuninsuredinventory
inoneofPumpkin'swarehouses.
2)OnFebruary17,2010,youdiscoveredthatonFebruary16,2010,aflooddestroyedtheentireuninsured
inventoryinoneofPumpkin'swarehouses.
3)OnFebruary17,2010,youdiscoveredthatonNovember30,2009,aflooddestroyedtheentireuninsured
inventoryinoneofPumpkin'swarehouses.
4)OnApril5,2010,youdiscoveredthatonMarch30,2010,afiredestroyedoneofPumpkin's10plants.
5)OnApril7,2010,youdiscoveredthatadebtorofPumpkinwentbankruptonJanuary6,2010.
6)OnJanuary16,2010,alawsuitwasfiledagainstPumpkinforapatentinfringementactionthatallegedlytook
placeinearly1999.IntheopinionofPumpkin'sattorneys,thereisareasonable(butnotprobable)dangerofa
significantlosstoPumpkin.
7)OnFebruary19,2010,Pumpkinsettledalawsuitoutofcourtthathadoriginatedin1998andiscurrently
listedasacontingentliability.
PossibleActions:
a.AdjusttheDecember31,2009financialstatements.
b.DisclosetheinformationinafootnoteintheDecember31,2009financialstatements
c.RequesttheclientreviseandreissuetheDecember31,2009financialstatements.Therevisionshouldinvolve
anadjustmenttotheDecember31,2009financialstatements.
d.RequesttheclientreviseandreissuetheDecember31,2009financialstatements.Therevisionshould
involvetheadditionofafootnote,butnoadjustment,totheDecember31,2009financialstatements.
e.Noactionisrequired.
1.d;2.b;3.a;4.e;5.c;6.b;7.a
AACSB:Communications
AICPABB:Legal
AICPAFN:Reporting
Blooms:Application
Difficulty:Hard
LearningObjective:11
LearningObjective:5
MessierChapter17#83
39