13.5 Flashcards
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
The prospective client’s unwillingness to permit inquiry of its legal counsel.
Management is responsible for adopting policies and procedures to identify, evaluate, and account for litigation, claims, and assessments. If the client refuses the auditor’s request to obtain corroborating information from legal counsel, a scope limitation exists that could result in a disclaimer of an opinion or withdrawal from the audit (AU-C 501).
Which of the following statements extracted from entity’s legal counsel’s letter regarding litigation, claims, and assessments most likely would cause the auditor to request clarification?
“I believe that the plaintiff will have problems establishing any liability.”
The letter of inquiry requests, among other things, that legal counsel evaluate the likelihood of unfavorable outcomes of pending or threatened litigation, claims, and assessments. It also requests that legal counsel estimate, if possible, the amount or range of potential loss (AU-C 501). Thus, the auditor is concerned about the amount of the expected settlement as well as the likelihood of the outcome. However, the statement that the plaintiff will have problems establishing any liability is unclear. For example, a plaintiff may have problems yet still prevail.
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Investigate changes in noncurrent debt occurring after year end.
Procedures that should be performed as near as practicable to the report date include investigating any increases in capital or issuance of debt, such as the issue of new shares or bonds.
Of which of the following matters is a management representation letter required to contain specific representations?
Information concerning fraud by the CFO.
The CEO and the CFO usually sign the management representation letter. They state that they have no knowledge of any fraud or suspected fraud affecting the entity involving (1) management, (2) employees having significant roles in internal control, or (3) others if the fraud could materially affect the financial statements.
Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero’s plans for dealing with the adverse effects of future conditions and events, Cooper most likely will consider, as a mitigating factor, Zero’s plans to
Postpone expenditures for research and development projects.
Once an auditor has identified conditions and events indicating that substantial doubt exists about an entity’s ability to continue as a going concern, the auditor should first obtain written representations and then consider management’s plans to mitigate their adverse effects. The auditor should consider plans to dispose of assets, borrow money or restructure debt, reduce or delay expenditures, and increase equity.
Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco’s December 31, Year 1, financial statements on March 6, Year 2, the date of the auditor’s report. A subsequently discovered fact requiring revision of the Year 1 financial statements occurred on April 10, Year 2, and came to Wilson’s attention on April 24, Year 2. If the fact became known prior to the report release date, and the revision is made, Wilson’s report ordinarily should be dated
Using duel-dating.
A subsequently discovered fact (1) becomes known to the auditor after the report date and (2) may cause the auditor to revise the report. The report date is no earlier than the date when sufficient appropriate evidence is obtained. If such a fact becomes known to the auditor before the report release date, the auditor should (1) discuss the matter with management and (2) determine whether the statements need revision (adjustment or disclosure). If management revises the statements, the auditor should perform the necessary procedures on the revision. The auditor also (1) dates the report as of a later date or (2) dual-dates the report. Dual-dating indicates that the procedures performed subsequent to the original date are limited to the revision. Unless the auditor extends subsequent events procedures to a new date (one presumably later than April 24, Year 2, the date when the subsequently discovered fact became known), the auditor should dual-date the report.
Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for an audit?
Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud.
The auditor should obtain written representations from management acknowledging management’s responsibility for establishing and maintaining effective ICFR.
Which of the following statements ordinarily is included among the written management representations obtained by the auditor in an audit of a nonissuer?
All transactions have been recorded in the accounting records.
AU-C 580 lists the concerns ordinarily addressed in management representation letters, if applicable. The list includes disclosures about the recording of all transactions.
Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
Inquiring of the entity’s legal counsel about litigation, claims, and assessments.
The letter of inquiry requests, among other things, that legal counsel evaluate the likelihood of unfavorable outcomes of pending or threatened litigation, claims, and assessments. It also requests that legal counsel estimate, if possible, the amount or range of potential loss (AU-C 501). Thus, the inquiry may reveal information indicating that the auditee’s existence is threatened.
In obtaining written representations from management, materiality limits ordinarily would apply to representations related to
Amounts concerning related party transactions.
An audit may not provide assurance that all related party transactions will be discovered. The auditor typically sets materiality limits to efficiently perform the audit.
An auditor is reporting on comparative financial statements for 3 years. Which of the following statements is correct regarding written representations from management?
The representation letter needs to address all of the years being covered in the report.
The written representation letter should address all of the years being covered in the report.
Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?
“Sufficient evidence has been made available to the auditor to permit the expression of an unmodified opinion.”
The sufficiency and appropriateness of audit evidence are determined by the professional judgment of the auditor (AU-C 200).
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in legal counsel’s response to the auditor’s letter of inquiry?
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
An inquiry letter response from the client’s legal counsel will normally include information or comment about each pending or threatened litigation, claim, or assessment. Legal counsel should (1) address the progress of the case, (2) describe the action the company plans to take, (3) evaluate the likelihood of an unfavorable outcome, and (4) estimate (if possible) the range of any potential loss. Legal counsel does not have the expertise or appropriate information to make a judgment about the client’s ability to continue as a going concern. The auditor normally makes that judgment.
Which of the following events requires adjustment to the financial statements for the year ended December 31, Year 1?
Loss on an accounts receivable as the result of a customer suffering a deteriorating financial condition that led to bankruptcy filing in January Year 2.
A loss is probable because an asset (a receivable) was impaired at the balance sheet date as a result of the bankruptcy filing in January Year 2. A loss is accrued if it can be reasonably estimated. A loss must be disclosed in the notes if it is probable and reasonably possible.
Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Inquiring as to whether any unusual adjustments were made after year end.
Subsequent events procedures include inquiring of management as to whether (1) subsequent events occurred that might affect the statements; (2) new commitments, borrowings, or guarantees were made; (3) sales or acquisitions of assets occurred or were planned; (4) capital increased or debt was issued; (5) developments regarding contingencies occurred; (6) any events occurred (a) casting doubt on the appropriateness of accounting policies or (b) that are relevant to the measurement of estimates or the recovery of assets; (7) any unusual accounting adjustments were made or considered; and (8) changes occurred in the current status of items that were accounted for on the basis of preliminary or inconclusive data.
