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| 1 | |
Which of the following is an example of a contingency? |
| | A) | Accounts payable. |
| | B) | Long-term debt. |
| | C) | Product warranty. |
| | D) | All liabilities are ‘contingencies’. |
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| 2 | |
An auditor would be most likely to identify a contingent liability by obtaining a(n) |
| | A) | Accounts payable confirmation. |
| | B) | Bank confirmation of the entity’s cash balance. |
| | C) | Letter from the entity’s external legal counsel. |
| | D) | List of subsequent cash receipts. |
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| 3 | |
When auditing contingencies, which of the following procedures would generally be least effective? |
| | A) | Reading the minutes of the board and other committee meetings. |
| | B) | Examining documentation related to possible tax disputes. |
| | C) | Examining legal letters. |
| | D) | Examining accounts payable confirmations. |
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| 4 | |
A lawyer’s response to an auditor’s inquiry concerning litigation, claims and assessments may be limited to matters that are considered individually or collectively material to the entity’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose? |
| | A) | The auditor and the entity’s management. |
| | B) | The entity’s board of directors and the lawyer. |
| | C) | The lawyer and the auditor. |
| | D) | The entity’s management and the lawyer. |
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| 5 | |
An auditor should request that an audited entity send a letter of inquiry to those lawyer who have been consulted concerning litigation, claims or assessments. The primary reason for this request is to provide |
| | A) | The opinion of an expert as to whether loss contingencies are probable, neither probable nor remote. |
| | B) | A description of litigation, claims, and assessments that have a reasonable possibility of unfavourable outcome. |
| | C) | An objective appraisal of management’s policies and procedures adopted for identifying and evaluating legal matters. |
| | D) | Corroboration of evidence regarding litigation, claims and assessments. |
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| 6 | |
In most cases, commitments |
| | A) | Are likely to result in additional losses to the entity. |
| | B) | Are found through the accounts payable search for unrecorded liabilities. |
| | C) | Require adjustments to the financial statement amounts. |
| | D) | Are disclosed in a note to the financial statements. |
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| 7 | |
Which of the following is an example of a subsequent event that requires disclosure in the notes to the financial statements (but not adjustments to the financial statements)? |
| | A) | An entity’s customer, who has been experiencing financial difficulty for several months, declares bankruptcy. The customer is one of over 1000 customers of the entity and appropriate reserves for any related accounts receivable have been properly maintained. |
| | B) | The entity completes an environmental clean-up. The liability for the clean-up was recorded as a contingency at the balance sheet date. |
| | C) | An event that confirms the auditor’s belief that a large portion of the entity’s inventory is obsolete. The issue was documented prior to the end of the fiscal year and appropriate inventory adjustments were made at the balance sheet date. |
| | D) | A chemical explosion at a customer’s warehouse causes all accounts receivable from that customer to be uncollectible. |
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| 8 | |
Which of the following events occurring after the issuance of an auditor’s report would most likely cause the auditor to make further inquiries with management to determine whether the financial statements need amendment? |
| | A) | An uninsured flood occurs that may affect the entity’s ability to continue as a going concern. |
| | B) | A major contingency is resolved that had been disclosed in the audited financial statements. |
| | C) | New information is discovered leading the auditor to believe that lease transactions during the audit period should have been accounted for as capital rather than operating leases. |
| | D) | A subsidiary is sold that accounts for 25 per cent of the entity’s consolidated revenues. |
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| 9 | |
All of the following are typical audit procedures used to identify subsequent events except: |
| | A) | Inquiring of management as to their knowledge of subsequent events. |
| | B) | Reading available interim financial statements from after year end. |
| | C) | Reading board meeting minutes for meetings held after year end. |
| | D) | Extending the search for unrecorded liabilities to the report date. |
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| 10 | |
Analytical procedures performed at the overall review stage of an audit appear to indicate that several accounts have unexpected balances and/or relationships. The result of these procedures most likely would indicate that |
| | A) | Internal control activities are not operating effectively. |
| | B) | The communications with those charged with governance should be revised. |
| | C) | Additional detail tests of account balances are necessary. |
| | D) | Fraud exists among the relevant account balances involved. |
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| 11 | |
According to quality control standards, an auditor should retain audit documentation for how long of a period of time from the date of the auditor’s report? |
| | A) | No shorter than seven years. |
| | B) | No shorter than five years. |
| | C) | Four years for electronic documentation; five years for physical documentation. |
| | D) | The same period as required under tax laws. |
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| 12 | |
Final analytical procedures are generally intended to |
| | A) | Provide the auditor with a final, overall evaluation of the relationships among financial statement balances. |
| | B) | Test transactions to corroborate management’s financial statement assertions. |
| | C) | Obtain evidence concerning account balances that have not yet been investigated. |
| | D) | Retest control activities that appeared to be ineffective during the assessment of control risk. |
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| 13 | |
Which of the following conditions or events are most likely would cause an auditor to have significant doubt about an entity’s ability to continue as a going concern? |
| | A) | Communications with those charged with governance indicate a higher than normal rate of employee turnover. |
| | B) | Normal trade credit from major suppliers has recently been restricted or denied. |
| | C) | There are a significant number of related party transactions occurring. |
| | D) | Plans to repurchase a large block of treasury stock have been delayed. |
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| 14 | |
Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate significant doubt about an entity’s ability to continue as a going concern? |
| | A) | Review compliance with the terms of debt agreements. |
| | B) | Review management’s plans to dispose of assets. |
| | C) | Evaluate management’s plans to borrow money or restructure debt. |
| | D) | Consider management’s plans to reduce or delay expenditures. |
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| 15 | |
Auditing standards primarily encourage which of the following conversations about financial reporting? |
| | A) | A conversation with those charged with governance to discuss matters pertaining to financial reporting. |
| | B) | A conversation with only management to discuss matters pertaining to financial reporting. |
| | C) | A conversation with the head of the entity’s internal audit department to discuss matters pertaining to financial reporting. |
| | D) | A conversation in which those charged with governance report on management’s views on matters pertaining to financial reporting. |
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| 16 | |
The auditor must communicate several items to ‘those charged with governance’ at the conclusion of the audit. Which of the following is not a typical communication? |
| | A) | Uncorrected misstatements. |
| | B) | Significant matters in connection with the entity’s related parties. |
| | C) | The planned audit procedures for the audit. |
| | D) | Significant deficiencies in internal control identified. |
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| 17 | |
Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor’s report would be most likely to cause the auditor to make further inquiries about the financial statements? |
| | A) | A technological development in the industry that could affect the entity’s future ability to continue as a going concern. |
| | B) | The entity’s sale of a subsidiary that accounts for 30 per cent of the entity’s consolidated sales. |
| | C) | The discovery of information regarding a contingency that existed before the financial statements were issued. |
| | D) | The final resolution of a lawsuit that was disclosed as a contingency in a note to the financial statements. |
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