Ch 16 HW
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."
Financial Statement Effect: Verify amount due attorney is recorded in financial statement amounts. Audit response: Update legal response.
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.
Financial statement effect: Disclosure in notes relating to nature of litigation, but no amount disclosed. Audit response: Update audit report date
The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1 ("legal response"). For each excerpt, select the most appropriate financial statement effect and audit response. Each excerpt is independent. Responses may be used once, more than once, or not at all from the table below: a)The client's year-end is December 31, year 1. b)The anticipated audit report date is February 15, year 2. c)All amounts are material to the financial statements. 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."
Financial statement effect: No impact on financial statement amounts or notes. Audit response: Legal response is appropriately dated.
In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items: Required: 1. For each of the subsequent events, indicate whether they should result in: Adjustment—an adjusting entry as of 20X3. Consider Disclosure—consideration of note disclosure as of 20X3. 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
On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.
Adjustment
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? -Early retirement of bonds payable. -Plant closure due to a strike. -Settlement of litigation. -A business combination.
Settlement of litigation.
The aggregated misstatement in the financial statements is made up of: Factual Misstatements Projected Misstatements Judgmental Misstatements
Yes, Yes, Yes
When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? -Investing -Operations -Financing -Capitalization
Capitalization
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
On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.
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: -Evaluate management's performance in causing this decline. -Require note disclosure. -Express an opinion that is qualified due to the inability of the client company to continue as a going concern. -Consider the possibility of a misstatement in the financial statements.
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? -A business combination completed after year-end, but for which negotiations began prior to year-end. -Introduction of a new line of products after year-end for which major research had been completed prior to year-end. -Customer checks deposited prior to year-end but determined to be uncollectible after year-end. -A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago.
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. -Date the report is filed with the SEC. -Day the audit report is issued. -End of the client's year.
Date of the auditors' report.
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: -January 17, 20X9. -February 16, 20X9. -December 31, 20X8. -February 10, 20X9.
February 10, 20X9.
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.
Financial statement effect: Disclosure in notes relating to nature of litigation, but no amount disclosed. Audit response: Update audit report date.
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.
Financial statement effect: Disclosure in notes relating to nature of litigation, including loss amount. Audit response: Legal response is appropriately dated.
A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): -Analytical process. -Unasserted claim. -Loss contingency. -Probable loss.
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? -Examine human resources records for accuracy and completeness. -Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. -Visit the working areas and verify that employees exist by examining their badge or identification numbers. -Make a surprise observation of the company's regular distribution of paychecks on a test basis.
Make a surprise observation of the company's regular distribution of paychecks on a test basis.
Which of the following procedures is most likely to be included near completion of an audit? -Obtaining an understanding of internal control. -Observation of inventory. -Performing analytical procedures. -Confirmation of receivables.
Performing analytical procedures.
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. -Test commission earnings. -Investigate fluctuations in salaries, wages, and commissions. -Test computations of compensation under profit sharing for bonus plans.
Test whether employee time reports are approved by supervisors.
In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28, 20X4, may affect the company's financial statements. The following material events or transactions have come to her attention: Required: For each of the subsequent events, indicate whether they should result in: Adjustment—an adjusting entry as of 20X3. Possible Disclosure—Consider note disclosure as of 20X3. On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.
Adjustment
On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.
Adjustment
On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.
Consider Disclosure
On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.
Consider Disclosure
January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.
Consider Disclosure 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.
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 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.
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: -Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. -Notify the board of directors that the auditor's report must no longer be associated with the financial statements. -Issue revised pro forma financial statements taking into consideration the newly discovered information. -Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
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.
Financial statement effect: Potential litigation settlement accrued in financial statements. Audit response: Legal response is appropriately dated.