SU 13

Which of the following statements about litigation, claims, and assessments extracted from a letter from a client's legal counsel is most likely to cause the auditor to request clarification?

"I believe that the action can be settled for less than the damages claimed."

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."

Which of the following statements in an attorney's legal letter requires further investigation?

"It is our opinion that the company will be able to assert meritorious defenses to this action."

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."

Which of the following matters most likely would be included in a management representation letter?

A confirmation that the entity has complied with contractual agreements.

The auditor learned of the following situations after issuing the audit report on February 6. Each is important to users of the financial statements. For which one does the auditor have responsibility for disclosure of the newly discovered facts?

A conflict of interest involving credit officers and a principal company supplier that existed during the audit year was discovered on March 3.

Which of the following is the auditor's primary means of obtaining corroboration of information furnished by management concerning litigation, claims, and assessments?

A letter of audit inquiry to the client's lawyer.

The refusal of a client's legal counsel to provide information requested in an inquiry letter generally is considered

A limitation on the scope of the audit.

Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?

A management representation letter.

The refusal of a client's legal counsel to provide a representation on the legality of a particular act committed by the client is ordinarily

A scope limitation.

As a result of newly discovered facts, an auditor has concluded that action should be taken to prevent future reliance on the report. (S)he should

Advise the client to make appropriate disclosure of the facts and their impact on the financial statements to persons who are known to be currently relying or who are likely to rely on the financial statements and the related auditor's report.

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.

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to

Amounts concerning related party transactions.

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.

Legal counsel's response to an auditor's request for information regarding litigation, claims, and assessments will ordinarily contain which of the following?

An explanation regarding limitations on the scope of the response.

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

As close to the date of the auditor's report as possible.

"In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies." The foregoing passage most likely is from a(n)

Audit inquiry letter to legal counsel.

Which of the following factors most likely would cause an auditor to question the integrity of management?

Audit tests detect material fraud that was known to management, but not disclosed to the auditor.

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

Auditor's report.

The date of the management representation letter should be at the date of the

Auditor's report.

Management should address written representations about a firm's annual audit to the

Auditor.

Subsequent events are defined as events that occur subsequent to the

Balance sheet date but prior to the auditor's report date.

Which of the following conditions or events is most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Cash flows from operating activities are negative.

A written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

Chief executive officer and the chief financial officer.

If the auditor determines that an inquiry of a client's external legal counsel is necessary, who should make the inquiry?

Client management.

The primary source of information to be reported about litigation, claims, and assessments is the

Client's management.

Which of the following procedures would an auditor generally perform regarding subsequent events?

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

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Compare the latest subsequent interim financial information with the financial statements being reported upon.

When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations

Complement, but do not replace, substantive procedures designed to support the assertion.

Harvey, CPA, is preparing an audit plan to determine the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in accordance with U.S. GAAP. Which one of the following procedures is least appropriate for this purpose?

Confirm as of the date of the auditor's report accounts receivable that have increased significantly from the year-end date.

Which of the following is not an audit procedure that the auditor performs with respect to litigation, claims, and assessments?

Confirm directly with the client's legal counsel that all claims have been recorded in the financial statements.

Which of the following auditing 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?

Confirming with third parties the details of arrangements to maintain financial support.

When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to

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

After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes

Considering the adequacy of disclosure about the client's possible inability to continue as a going concern.

The primary reason an auditor requests letters of inquiry be sent to a client's legal counsel is to provide the auditor with

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

If deemed necessary, the auditor should request that an audit client send a letter of inquiry to those attorneys who have been consulted regarding litigation, claims, or assessments. The primary reason for this request is to provide

Corroborative evidence.

Subsequent to the issuance of the financial statements, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts The auditor most likely should

Determine whether persons are relying or likely to rely on the financial statements who would attach importance to the information.

After the balance sheet date, an auditor's client suffers a material loss from a decline in value of marketable securities. Which of the following actions should the auditor advise the client to take?

Disclose the material loss in the financial statements to assure that the financial statements are not misleading.

A written management representation letter is most likely to be an auditor's best source of corroborative information of a client's intention to

Discontinue a line of business.

Soon after Boyd's audit report was released, Boyd learned of certain related party transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the financial statements. Boyd should

Discuss the matter with management.

Which of the following procedures would an auditor most likely perform regarding litigation?

Discuss with management its policies and procedures for identifying and evaluating litigation.

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material.

Kirk Keller, CPA, was about to express an unmodified opinion on the audit of Lupton Television Broadcasting Company when he received a letter from Lupton's independent counsel. The letter stated that the Federal Communications Commission has notified Lupton that its broadcasting license will not be renewed because of some alleged fraud in its broadcasting practices. Lupton cannot continue to operate without this license. Keller has also learned that Lupton and its independent counsel plan to take all necessary legal action to retain the license. The letter from the independent counsel, however, states that a favorable outcome of any legal action is highly uncertain. Based on this information, Keller should

Express an unmodified opinion with disclosure of the event in a separate emphasis-of-matter paragraph of his report.

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Extend the due dates of existing loans.

To which of the following matters would an auditor not apply materiality limits when obtaining specific written management representations?

Fraud involving employees with significant roles in internal control.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to

Increase ownership equity.

Of which of the following matters is a management representation letter required to contain specific representations?

Information concerning fraud by the CFO.

After issuing an auditor's report, an auditor has no obligation to make continuing inquiries about audited financial statements unless

Information that existed at the report date and may affect the report comes to the auditor's attention.

After the date of the report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless

Information, which existed at the report date and may affect the report, comes to the auditor's attention.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Inquire about the current status of transactions that were recorded on the basis of preliminary data.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Inquire of management whether new shares have been issued since the year end.

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.

A company's management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of corroborating management's information?

Inquiring of company's outside counsel.

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.

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end.

To which of the following matters would materiality limits not apply when obtaining written client representations?

Instances of fraud involving management.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Investigate changes in debt recorded after year end.

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.

Key Co. plans to present comparative financial statements for the years ended December 31, Year 1 and Year 2, respectively. Smith, CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, Year 3. Key's current management team was not present until January 1, Year 2. What period of time should be covered by Key's management representation letter?

January 1, Year 1, through May 1, Year 3.

An auditor should obtain evidence relevant to all the following factors relevant to third-party litigation against a client except the

Jurisdiction in which the matter will be resolved.Answer (A) is correct.

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Lease rather than purchase operating facilities.

Krim, president and CEO of United Co., engaged Smith, CPA, to audit United's financial statements so that United could secure a loan from First Bank. Smith expressed an unmodified opinion on May 20, but the loan was delayed. On August 5, on inquiry to Smith by First Bank, Smith, relying on Krim's written representation, made assurances that United's financial status had not changed materially. Krim's representation was untrue because of a material change after May 20. First relied on Smith's assurances of no change. Shortly afterward, United became insolvent. If First sues Smith for negligent misrepresentation, Smith will likely be found

Liable, because Smith should have obtained sufficient appropriate audit evidence to verify the status of United.

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.

In connection with the annual audit, which of the following is not a subsequent events procedure?

Make inquiries with respect to the financial statements covered by the auditor's previously issued report if new information has become available during the current audit that might affect that 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.

An auditor should obtain written representations from management about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by

Management and the auditor.

Which of the following management roles would typically be acknowledged in a management representation letter?

Management has the responsibility for the design of controls to detect fraud.

"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a

Management representation letter.

"We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a(n)

Management representation letter.

Which of the following matters will an auditor most likely include in a management representation letter?

Management's acknowledgment of its responsibility to detect employee fraud.

For which of the following matters should an auditor obtain written management representations?

Management's compliance with contractual agreements that may affect the financial statements.

An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern?

Management's plans for disposal of assets.

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the

Marketability of assets that management plans to sell.

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

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

Subsequent events that provide evidence of conditions that arose subsequent to the date of the financial statements

May require disclosure in notes to the financial statements.

Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill's plans for dealing with the adverse effects of future conditions and events, Davis most likely will consider, as a mitigating factor, Hill's plans to

Negotiate reductions in required dividends being paid on preferred stock.

Which of the following events that occurred after a client's calendar-year end, but before the audit report date, would require disclosure in the notes to the financial statements, but no adjustment in the financial statements?

New convertible bonds are issued to expand the company's product line.

Which of the following events occurring after the issuance of the financial statements most likely would cause the auditor to make further inquiries about the previously issued financial statements?

New information is discovered concerning undisclosed lease transactions of the audited period.

After releasing the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless

New information is discovered concerning undisclosed related party transactions of the previously audited period.

Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

New information is discovered concerning undisclosed related-party transactions of the prior year.

Which of the following events occurring after the issuance of the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

New information regarding significant unrecorded transactions from the year under audit is discovered.

Which of the following expressions most likely would be included in a representation letter by management of an issuer?

No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

After year end but before completion of the audit, a major investment adviser issued a pessimistic report on Investee Co.'s long-term prospects. The market price for its common stock subsequently declined significantly. What is the effect of this event on the year-end statements?

No financial statement disclosure necessary.

Advertiser Co.'s directors voted immediately after year end to double the advertising budget for the coming year and authorized a change in advertising agencies. What is the effect of this event on the year-end statements?

No financial statement revision.

On February 25, financial statements were released with an auditor's report expressing an unmodified opinion on the statements for the year ended January 31. On March 2, the CPA learned that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that creditors are currently relying on the financial statements. The CPA's next course of action most likely is to

Notify management and those charged with governance that the auditor will seek to prevent future reliance on the auditor's report.

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

Obtain a list from management that discloses all unasserted claims that it considers to be probable of assertion.

When an audit is made in accordance with auditing standards, the auditor should always

Obtain certain written representations from management.

Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies?

Obtaining a letter of audit inquiry from the client's lawyer.

Which of the following auditing procedures is ordinarily performed last?

Obtaining a management representation letter.

An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the

Possible effects on the entity's 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.

An auditor believes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Postpone expenditures to upgrade its information technology system.

Some subsequent events provide evidence of conditions not in existence at the balance sheet date. Under U.S. GAAP, some of these events are of such a nature that disclosure is required to keep the financial statements from being misleading. Adequate disclosure of these events may include

Pro forma financial statement presentation.

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?

Read the file of correspondence from taxing authorities.

Which of the following procedures should an auditor ordinarily perform regarding subsequent events?

Read the latest subsequent interim financial statements.

Which of the following audit 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?

Reading the minutes of meetings of the shareholders and the board of directors.

A CPA firm is completing the field work for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson's ability to continue as a going concern for a reasonable period of time?

Recurring working capital shortages.

Management provides the auditor with information regarding litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?

Request that management prepare a letter of inquiry to legal counsel with whom management consulted regarding litigation, claims, and assessments.

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may

Require disclosure to keep the financial statements from being misleading.

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 an entity's ability to continue as a going concern?

Review of compliance with terms of debt agreements.

Which of the following procedures would best detect a liability omission by management?

Review purchase contracts and other legal documents.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments?

Reviewing the response from the client's legal counsel to a letter of inquiry.

After an audit report containing an unmodified opinion on a nonissuer's financial statements was dated and the financial statements issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should

Take no action because the auditor has no obligation to make any further inquiries.

On February 17, Year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $550,000 as of December 31, Year 1. The company anticipates that insurance proceeds of $300,000 will be received. The audit of the financial statements dated December 31, Year 1, was completed February 25, Year 2. How should the fire be reported in the financial statements for the year ended December 31, Year 1?

The December 31, Year 1, financial statements should disclose the effect of the fire with no financial statement adjustment.

Legal counsel's response to an auditor's inquiry about litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties may reach an understanding on the limits of materiality for this purpose that are stated in the letter of inquiry?

The auditor and the client's management.

To which of the following matters would materiality limits not apply in obtaining written management representations?

The availability of minutes of shareholders' and directors' meetings.

If management refuses to provide certain written representations that the auditor believes are essential, which of the following is appropriate?

The client's refusal may have an effect on the auditor's ability to rely on other representations of management.

Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report?

The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

Which of the following statements is correct regarding a management representation letter?

The date of the representation letter should typically be the same as the audit report.

Which of the following events occurring after the date of the report most likely will cause the auditor to make further inquiries about the previously issued financial statements?

The discovery of information regarding a contingency that existed before the financial statements were issued.

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?

The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.

If a nonissuer refuses to give permission to the auditor to communicate with its external legal counsel, then the auditor should modify which of the following?

The opinion in the auditor's report.

A purpose of a management representation letter is to reduce

The possibility of a misunderstanding concerning management's responsibility for the financial statements.

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.

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.

On April 14, Year 2, an auditor expressed an unmodified opinion on the financial statements of the Emerson Company for the year ended February 28, Year 2. A structural defect in Emerson's recently completed plant first appeared in late Year 1, but the auditor did not learn of it until April 25, Year 2. On May 1, Year 2, the auditor learned that the defect would cause material losses to the company. The auditor's primary responsibility is

To determine that immediate steps are taken to inform all parties who are relying on information contained in the statements.

A CPA has received legal counsel's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's legal counsel shortly after receipt of the letter should alert the auditor that

Undisclosed unasserted claims may have arisen.

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 dual-dating.

A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate's external counsel to identify any pending and/or unasserted claims against Paper Plate. The CPA received a letter from the external counsel with the following response: "We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured 2 years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2 million." Should the CPA accept the letter from the external counsel?

Yes, even though the CPA did not get a specific amount of loss.

Zero Corp. suffered a loss having a material effect on its financial statements as a result of a customer's bankruptcy that rendered a trade receivable uncollectible. This bankruptcy occurred suddenly because of a natural disaster 10 days after Zero's balance sheet date but 1 month before the issuance of the financial statements and the auditor's report. Under these circumstances, the Event RequiresAuditor's FinancialFinancialReport Should StatementsStatementBe Modified Should BeDisclosure, butfor a Lack of AdjustedNo AdjustmentConsistency

no, yes, no