Chapter 17 Assignment Questions

Question 1

Three examples of:

Actual liabilities

Answer 1

1. Accrued interest payable
2. Accounts payable
3. Notes payable

Question 2

Three examples of:

Contingent liabilities

Answer 2

1. Income tax disputes
2. Product warranties
3. Pending litigation

Question 3

Subsequent events requing adjustment are those that have a direct effect on the financial statements.

List two examples.

Answer 3

1. The declaration of bankruptcy due to the deteroirating financial condition of a customer with a large outstanding accounts receivable balance
2. The settlement of a litigation for an amount different recorded in the books

Question 4

Subsequent events requiring disclosure are those that have no direct effect on the financial statements

List three examples.

Answer 4

1. The decline in the market value of securities held for temporary investment or resale
2. The issuance of bonds or equity securities
3. Declaration of bankruptcy by a customer (with a large outstanding accounts receivable balance) that was inadequately insured and lost everything due to fire subsequent to the auditor’s report date

Question 5

Which letter would this be included in?

Reccomendation to switch inventory valuation methods

Answer 5

Management letter

Question 6

Which letter would this be included in?

Merger or acquisition after the balance sheet date

Answer 6

Management representation letter

Question 7

Which letter would this be included in?

Compliance with aspects of contractual agreements that may effect the financials

Answer 7

Management representation letter

Question 8

Which letter would this be included in?

Reccomendation to install a formal security system

Answer 8

Management letter

Question 9

Which letter would this be included in?

Absence of unrecorded transactions

Answer 9

Management representation letter

Question 10

Which letter would this be included in?

Reccomendation to prepare more timely bank reconciliations

Answer 10

Management letter

Question 11

Which letter would this be included in?

Create a reccomendation to segregate duties

Answer 11

Management letter

Question 12

Which letter would this be included in?

Management’s acknowledgement of its responsibility for establishing and maintaining effective internal controls over financial reporting

Answer 12

Management representation letter

Question 13

Which letter would this be included in?

Management’s belief that the financial statements are fairly presented in conformity with generally accepted accounting principles

Answer 13

Management representation letter

Question 14

Which letter would this be included in?

Recommendation to have certain types of transactions authorized by specific individuals

Answer 14

Management letter