Ch. 16

During an audit engagement, Robert Wong, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments. What are the audit procedures Wong should follow with respect to the existence of loss contingencies arising from litigation, claims, or assessments? Do not discuss reporting requirements.

(1) Inquire of and discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. (2) Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet being reported on, and during the period from the balance sheet date to the date the information is furnished, including an identification of those matters referred to legal counsel. Wong also would obtain assurances from management, ordinarily in the form of a representation letter, that they have disclosed all such matters required to be disclosed by generally accepted accounting principles (FASB ASC 450). (3) Examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. (4) Obtain assurance from management, ordinarily in the form of a client representation letter, that it has disclosed all unasserted claims that the lawyer has identified as probable of assertion and must be disclosed in accordance with generally accepted accounting principles (FASB ASC 450). In addition, the auditor, with the client's permission, should inform the lawyer that the client has given the auditor this assurance. This client representation may be communicated by the client in the inquiry letter or by the auditor in a separate letter. The auditor also should request the client's management to send a letter of inquiry to those lawyers with whom it consulted concerning litigation, claims, and assessments. Examples of other procedures undertaken for different purposes that might also disclose litigation, claims, and assessments are the following: (a) Reading minutes of stockholders', directors', and appropriate committee meetings held during and subsequent to the period being examined. (b) Reading contracts, loan agreements, leases, and correspondence from taxing or other governmental agencies. (c) Reviewing correspondence with financial institution regarding guarantees and accommodation endorsements. (d) Inspecting other documents for possible guarantees by the client.

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.

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.

The date of the management representation letter should coincide with the:

date of the auditor's report.

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?

A substantial portion of the company's inventory was written off as obsolete on January 31.

Which of the following is not correct concerning a type I and a type II subsequent event?

A type II event may require adjustment to the financial statements and a type I may require note disclosure.

A lawsuit that was begun a year ago is settled.

Adjustment.

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.

A new subsidiary is purchased.

Disclosed.

A plant of the company is destroyed by fire.

Disclosed.

A significant decline in the value of inventories occurs.

Disclosed.

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

Known, projected, and other misstatements.

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

Loss contingency.

A major customer of the company is lost.

No disclosure.

An employee strike is called.

No disclosure.

Which of the following procedures is normally performed last?

Obtaining a management representation letter.

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

Perform analytical procedures.

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.

List the audit procedures that should be completed near the date of the audit report.

The audit procedures that are completed near the end of field work include: (1) Search for unrecorded liabilities. (2) Review the minutes of meetings. (3) Perform final analytical procedures. (4) Perform procedures to identify loss contingencies. (5) Perform the review for subsequent events. (6) Obtain the representation letter.

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

The date of the auditors' report.

Which of the following is true?

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the audit report release date.

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:

the auditors' report.