AUDIT FINAL !!!

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? A.No financial statement disclosure necessary. B.Adjustment of the financial statements. C.Disclosure in a note to the financial statements. D.Disclosure by means of supplemental, pro forma financial data.

A

Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under audit because such events typically represent the A.Culmination of conditions that existed at the balance sheet date. B.Final estimates of losses relating to casualties occurring in the subsequent events period. C.Discovery of new conditions occurring in the subsequent events period. D.Preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

A

Which of the following procedures can be performed only after the date of the financial statements? A.Examination of data to determine that a proper cutoff has been made. B.Tests of the details of balances. C.Reading of the minutes of the board of directors' meetings. D.Tests of the details of transactions.

A

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A.Inquiring as to whether any unusual adjustments were made after year end. B.Confirming a sample of material accounts receivable established after year end. C.Investigating personnel changes in the accounting department occurring after year end. D.Comparing the financial statements being reported on with those of the prior period.

A

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 a significant direct effect on the financial statements. The auditor should A.Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known. B.Advise management to disclose the event in notes to the financial statements. C.Disclose the event in the auditor's report. D.Advise management to adjust the financial statements.

B

Subsequent events that provide evidence of conditions that arose subsequent to the date of the financial statements A.Should ordinarily be disclosed in the auditor's report. B.May require disclosure in notes to the financial statements. C.Should not be considered for any purposes. D.Require adjustment of the financial statements.

B

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

B

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

B

Which of the following procedures should an auditor ordinarily perform regarding subsequent events? A.Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests. B.Read the latest subsequent interim financial statements. 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.

B

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events? A.Confirming bank accounts established after year end. B.Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end. C.Investigating changes in equity occurring after year end. D.Recomputing a sample of large-dollar transactions occurring after year end for arithmetic accuracy.

B

Which of the following statements is true about related party transactions? A.In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business. B.The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed. C.An auditor should determine whether a particular transaction would have occurred if the parties had not been related. D.An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions.

B

Which of the following steps should an auditor perform first to determine the existence of related parties? Answers A.Examine invoices, contracts, and purchasing orders. B.Inquire about the existence of related parties from management. C.Review the company's business structure. D.Review proxy and other materials filed with the SEC.

B

Which of the following would not necessarily be a related party transaction? A.A purchase from another corporation that is controlled by the corporation's chief shareholder. B.A sale to another corporation with a similar name. C.Loan from the corporation to a major shareholder. D.Sale of land to the corporation by the spouse of a director.

B

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? A.Disclosure by means of supplemental, pro forma financial data. B.Disclosure in a note to the financial statements. C.No financial statement revision. D.Adjustment of the financial statements.

C

After issuing an auditor's report, an auditor has no obligation to make continuing inquiries about audited financial statements unless A.A final resolution is made of a contingent liability that had been disclosed in the financial statements. B.An event occurs just after the auditor's report was issued that affects the entity's ability to continue as a going concern. C.Information that existed at the report date and may affect the report comes to the auditor's attention. D.Information about a material transaction that occurred just after the auditor's report was issued is deemed to be reliable.

C

An auditor has found that the notes to the financial statements do not mention that, 15 days after the balance sheet date, the company issued a substantial amount of debentures. According to the company's attorney, the debenture agreement restricts the payment of future cash dividends. The client has declined to include the matter of the debentures in the notes because the issuance occurred after the balance sheet date. The auditor should A.Provide the missing information in the report and disclaim an opinion. B.Add the note to the financial statements. C.Provide the missing information in the report and express a qualified opinion D.Provide the missing information in the report and express an adverse opinion.

C

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.Public issuance of the financial statements. B.Final review of the audit documentation. C.Auditor's report. D.Delivery of the auditor's report to the client.

C

Subsequent to the date 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. The auditor should A.Issue revised pro forma financial statements taking into consideration the newly discovered information. B.Request that management disclose the effects of the newly discovered information by adding a note to subsequently issued financial statements. C.Determine whether the financial statements need revision. D.Notify the board of directors that the auditor's report must no longer be associated with the financial statements.

C

Which of the following statements best expresses the auditor's responsibility with respect to events occurring after the balance-sheet date? A.The auditor's responsibility is to determine that transactions recorded on or before the balance-sheet date actually occurred. B.The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance-sheet date. C.The auditor is responsible for identifying subsequent events affecting the financial statements. D.The auditor is fully responsible for subsequent events and should extend all detailed procedures through the last day of field work.

C

On January 15, Year 2, before the Mapleview Co. released its financial statements for the year ended December 31, Year 1, it settled a long-standing lawsuit. A material loss resulted and no prior liability had been recorded. How should this loss be disclosed or recognized? A.No disclosure or recognition is required. B.The loss should be disclosed in an explanatory paragraph in the auditor's report. C.The loss should be disclosed in notes to the financial statements, but the financial statements themselves need not be adjusted. D.The financial statements should be adjusted to recognize the loss.

D

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 A.Restatement of prior-period financial statements. B.Adjustment of the financial statements. C.Notes to the auditor's report. D.Pro forma financial statement presentation.

D

Subsequent events are defined as events that occur subsequent to the A.Date of the auditor's report and concern contingencies that are not reflected in the financial statements. B.Date of the auditor's report. C.Release of the financial statements. D.Balance sheet date but prior to the auditor's report date.

D

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.Insufficient reason to modify the auditor's report because of the legal counsel's obligation of confidentiality. B.Sufficient reason to express a "subject to" opinion. C.Proper grounds to withdraw from the engagement. D.A scope limitation

D

When a contingency is resolved immediately subsequent to the issuance of financial statements with a report that included a paragraph emphasizing the contingency, the auditor should A.Inform the appropriate authorities that the report cannot be relied upon. B.Insist that the client issue revised financial statements. C.Inform the audit committee that the report cannot be relied upon. D.Take no action regarding the event.

D

Which of the following events most likely would indicate the existence of related party transactions? A.Granting stock options to key executives at favorable prices. B.Insuring the lives of key executives and listing the entity as beneficiary. C.Making a loan with specific scheduled terms for repayment of the funds. D.Selling real estate at a price that differs significantly from its appraised value.

D

Which of the following events requires adjustment to the financial statements for the year ended December 31, Year 1? A.Sale of a major bond issue in January Year 2. B.Loss on an accounts receivable as the result of a customer suffering a major loss from a flood in January Year 2. C.Loss of inventory due to an earthquake in January Year 2. D.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.

D

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? A.The potential impact on financial statements and associated audit reports for the previous 5 years. B.The client's willingness to pay additional fees for the additional procedures to be performed. C.The cost-to-benefit ratio of performing additional procedures to better determine the impact of the newly discovered facts. D.The client's willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement.

D