Chapter 24

Question 1

24-20

When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should

1. inform the appropriate authorities that the report cannot be relied on
2. take no action regarding the event
3. insist that the client issue revised financial statements
4. inform the audit committee that the report cannot be relied on

Answer 1

2. take no action regarding the event

Question 2

24-20b

Which of the following would be least likely to be included in a standard inquiry to the client’s attorney?

1. A list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement
2. A request that the attorney provide information about the status of pending litigation
3. A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client
4. A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

Answer 2

4. A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome

Question 3

24-20c

An example of an event occurring in the period between the end of the year being audited and the date of the auditor’s report that normally will not require disclosure in the financial statements or auditor’s report is
1. decreased sales volume resulting from a general business recession
2. serious damage to the company’s plant from a widespread flood
3. issuance of a widely advertised capital stock issue with restrictive covenants
4. settlement of a large liability for considerably less than the amount recorded

Answer 3

1. decreased sales volume resulting from a general business recession

Question 4

24-21a

Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance?

1. information about the auditor’s responsibility in an audit of financial statements
2. information about the overall scope and timing of the audit
3. significant findings arising from the audit
4. recommendations for improving a client’s business

Answer 4

4. recommendations for improving a client’s business

Question 5

24-21b

Written management representations obtained by the auditor in connection with a financial statement audit should include a

1. summary of all corrected misstatements
2. statement of management’s belief that any uncorrected misstatements are in fact not misstatements
3. statement of management’s belief that the effects of uncorrected misstatements are not material
4. summary of all uncorrected misstatements

Answer 5

3. statement of management’s belief that the effects of uncorrected misstatements are not material

Question 6

24-21c

A management letter

Answer 6

4. contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business

Question 7

24-22a

The Form 10-K filed by management of a public company includes a section on management’s discussion and analysis (MD&A) in addition to the annual financial statements. Which of the following best describes the auditor’s responsibility for the MD&A information?

Answer 7

3. The auditor must read the MD&A information to determine whether there us any material inconsistency with the audited financial statements

Question 8

24-23a

A client acquired 25 percent of its outstanding capital stock after year end but prior to the date of the auditor’s report. The auditor should

Answer 8

4. advise management to disclose the acquisition in the notes to the financial statements

Question 9

24-23b

Which of the following statements is correct about an auditor’s required communication with those charged with governance?

Answer 9

2. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management

Question 10

24-23c

In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of

Answer 10

2. reviewing derivative transactions reflected on the quarter-end balance sheet