Chapter 16 Homework

Letter dated February 14, year 2: R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. It is reasonably possible that the case will be settled for approximately $35,000.

3. Disclosure in notes relating to nature of litigation, including loss amount 7. Legal response is appropriately dated

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:

February 10, 20X9

Letter dated February 14, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1."

1. No impact on financial statement amounts or notes. 7. Legal response is appropriately dated.

Letter dated March 16, year 2: J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000.

2. Disclosure in notes relating to nature of litigation, but no amount disclosed. 9. Update audit report date

Letter dated February 14, year 2: L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case is tentatively settled for $35,000.

4. Potential litigation settlement accrued in financial statements. 7. Legal response is appropriately dated

The aggregated misstatement in the financial statements is made up of:

Factual Misstatements - Yes Projected Misstatements - Yes Judgmental Misstatements - Yes

Which of the following procedures is most likely to be included near completion of an audit?

Performing analytical procedures

Letter dated February 26, year 2: K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss.

2. Disclosure in notes relating to nature of litigation, but no amount disclosed. 9. Update audit report date

Letter dated January 21, year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1."

6. Verify amount due attorney is recorded in financial statement amounts. 8. Update legal response

A. January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.

Adjustment

D. On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.

Adjustment

Depending upon the details of the circumstances involved, some of the events may result in neither adjustment nor note disclosure. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.

C. and E.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?

Capitalization

B. January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.

Consider disclosure

C. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.

Consider disclosure

E. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.

Consider disclosure

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:

Consider the possibility of a misstatement in the financial statements.

Which of the following is most likely to be considered a Type 1 subsequent event?

Customer checks deposited prior to year-end but determined to be uncollectible after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the:

Date of the auditors' report.

Subsequent to the issuance of the auditor's report, 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. After determining that the information is reliable, the auditor should next:

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

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):

Loss contingency

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?

Make a surprise observation of the company's regular distribution of paychecks on a test basis.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?

Settlement of litigation

Which of the following is least likely to be considered a substantive procedure relating to payroll?

Test whether employee time reports are approved by supervisors.