Chapter 13

Question 1

What does a subsequent event include?

Answer 1

Subsequent event procedures include:

1. Reading the latest subsequent interim statements.
2. Inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters.
3. Reading the minutes of meetings of owners, management, and those charged with governance.
4. Obtaining a letter of representation from management
5. Inquiring of legal counsel
6. Obtaining an understanding of managements procedures for identifying subsequent events.

Question 2

The appropriate date for the client to specify as the effective date in the audit inquiry to legal counsel is?

Answer 2

As close to the date of the auditors report as possible.

Question 3

What should an auditor do after he/she identifies that substantial doubt exist for a company to continue as a going concern?

Answer 3

The auditor should consider managements plans to mitigate their adverse effects.
Management actions relating to plans to:

1. Dispose of assets
2. Borrow money or restructure debt
3. Reduce or delay expenditures, and
4. Increase equity

Question 4

A written managements representation letter is most likely to be an auditors best source of corroborative information of a client’s intention to:

Answer 4

Discontinue a line of business.

Question 5

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about the entity’s ability to continue as a going concern?

Answer 5

Review of compliance with terms of debt agreements.

Question 6

After year end, but before the completion of an audit a major investment advisor issued a pessimistic report, which resulted in a decline of the market price of common stocks.

What is the effect of this event on year end statements?

Answer 6

No financial statement disclosure is necessary.

The market price is not a financial event that affects the fairness or interpretation of the financial statements.

Question 7

The scope of an audit is not restricted when legal counsel’s response to an auditor as a result of a clients letter of inquiry limits the response to

Answer 7

Matters to which the legal counsel has given substantive attention in the form of legal representation.