QUIZ 5

Question 1

Statement 1: A provision is a liability of uncertain amount, timing, or existence
Statement 2: Subsequent events are those events occurring between the balance sheet date and the audit report
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 1

B. Statement 2 is correct

Question 2

Statement 1: All subsequent events require adjustments
Statement 2: PSA 580 requires an auditor to assess management’s assessment of any risk concerning going concern
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 2

D. Both statements are incorrect

Question 3

Statement 1: The auditor specifically has no responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern
Statement 2: The assessment of the going concern assumption shall be for a period of not more than one year from the balance sheet date
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 3

A. Statement 1 is correct

Question 4

Statement 1: The auditor’s main concern for related-party transactions is that they might not be presented or reflected as arm’s length transactions
Statement 2: If the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions, the auditor should withdraw from the engagement and issue an information memorandum detailing the reasons for such withdrawal
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 4

A. Statement 1 is correct

Question 5

Statement 1: The auditor should obtain written representations from management regarding matters which are material to the financial statements when other sufficient appropriate can be reasonably expected to exist
Statement 2: A management representation letter is required by PSAs
A. Statement 1 is correct
B. Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 5

B. Statement 2 is correct

Question 6

“Subsequent events” for reporting purpose are defined as events which occur subsequent to the:
A. Balance sheet date
B. Date of the auditor’s report
C. Balance sheet but prior to the date of the auditor’s report
D. Date of the auditor’s report and concern contingencies which are not reflected in the FS

Answer 6

A. Balance sheet date

Question 7

An auditor is concerned with completing various phases of the audit after the balance sheet date. This subsequent period extends to the date of the:
A. Final review of the financial statements.
B. Delivery of the auditor’s report to the client.
C. Public issuance of the financial statements.
D. Auditor’s report

Answer 7

D. Auditor’s report

Question 8

Which of the following procedures should an auditor ordinarily perform regarding subsequent events?
A. Compare the latest available interim financial statements with the financial statements being audited.
B. Send second requests to client’s customers who failed to respond to the first accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the client’s audit committee. D. Review the cutoff bank statements for several months after the year-end

Answer 8

A. Compare the latest available interim financial statements with the financial statements being audited.

Question 9

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?
A. Review the cut-off bank statements for the period after the year-end
B. Inquire the client’s legal counsel concerning litigation
C. Investigate reportable conditions previously communicated to the client
D. Analyze related party transactions to discover possible irregularities

Answer 9

B. Inquire the client’s legal counsel concerning litigation

Question 10

Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent:
A. The culmination of conditions that existed at the balance sheet date.
B. The final estimates of losses relating to casualties occurring in the subsequent events period.
C. The discovery of new conditions occurring in the subsequent events period
D. The preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

Answer 10

A. The culmination of conditions that existed at the balance sheet date.

Question 11

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they are issued?
A. Settlement of long-term debt using ordinary shares
B. Loss of a plant as a result of a flood
C. Major purchase of a business, which is expected to double sales volume
D. Settlement of litigation, in excess of the recorded liability

Answer 11

D. Settlement of litigation, in excess of the recorded liability

Question 12

A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit client believes that this event could have significant direct effect on the financial statements. The auditor should
A. Advise management to disclose the event in notes to the financial statements.
B. Disclose the event in the auditor’s report.
C. Withheld submission of the auditor’s report until the extent of the direct effect on the financial statements is known. D. Advise management to adjust the financial statements.

Answer 12

A. Advise management to disclose the event in notes to the financial statements.

Question 13

Harvey, CPA is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?
A. Inquire of management concerning events that may have occurred
B. Read the minutes of the board of directors
C. Confirm, as of the completion of field work, accounts receivable that have increased significantly from the year-end date
D. Obtain a lawyer’s letter as of the completion of field work.

Answer 13

C. Confirm, as of the completion of field work, accounts receivable that have increased significantly from the year-end date

Question 14

Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor’s primary means of initiating action to corroborate such information?
A. Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
B. Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.
C. Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
D. Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.

Answer 14

B. Request that client management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.

Question 15

The primary reason an auditor requests letters of inquiry be sent to a client’s legal counsel is to provide the auditor with
A. The probable outcome of asserted claims and pending or threatened litigation.
B. Corroboration of the information furnished by management about litigation, claims, and assessments.
C. Legal counsel’s opinion of the client’s historical experiences in recent similar litigation.
D. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date

Answer 15

B. Corroboration of the information furnished by management about litigation, claims, and assessments.

Question 16

When the auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to:
A. Prepare prospective financial information to verify whether management’s can be effectively implemented
B. Project future conditions and events for a period of time not to exceed one year following the date of the FS
C. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements
D. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.

Answer 16

D. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.

Question 17

Burr, CPA believes there is substantial doubt about the ability of Washington Co., to continue as a going concern for a reasonable period of time. In evaluating Washington’s plans for dealing with the adverse effects of future conditions and events, Burr most likely would consider, as a mitigating factor, Washington’s plans to
A. Accelerate research and development projects related to future products
B. Accumulate treasury stock at prices favorable to Washington’s historic price range
C. Purchase equipment and production facilities currently being leased
D. Negotiate reductions in required dividends being paid on preferred stock

Answer 17

D. Negotiate reductions in required dividends being paid on preferred stock