UNIT 14.1 TO 14.

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1.) The primary source of information to be reported about litigation, claims, and assessments is
the c.) Client’s management.

2.) Which of the following procedures would best detect a liability omission by management? d.)
Review purchase contracts and other legal documents

3.) Legal counsel’s response to an auditor’s inquiry about litigation, claims, and assessments may
be limited to matters that are considered individually or collectively material to the client’s
financial statements. Which parties may reach an understanding on the limits of materiality for this
purpose that are stated in the letter of inquiry? a.) The auditor and the client’s management.

4.) If the auditor determines that an inquiry of a client’s external legal counsel is necessary, who

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should make the inquiry? c.) Client management.

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5.) The primary reason an auditor requests letters of inquiry be sent to a client’s legal counsel is to
provide the auditor with b.) Corroboration of the information furnished by management about

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litigation, claims, and assessments.
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6.) A client is a defendant in a patent infringement lawsuit against a major competitor. Which of
the following items would least likely be included in legal counsel’s response to the auditor’s letter
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of inquiry? d.) An evaluation of the ability of the client to continue as a going concern if the
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verdict is unfavorable and maximum damages are awarded.

7.) Which of the following is not an audit procedure that the auditor performs with respect to
litigation, claims, and assessments? d.) Confirm directly with the client’s legal counsel that all
claims have been recorded in the financial statements.
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8.) The refusal of a client’s legal counsel to provide information requested in an inquiry letter
generally is considered b.) A limitation on the scope of the audit.

9.) Which of the following statements about litigation, claims, and assessments extracted from a
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letter from a client’s legal counsel is most likely to cause the auditor to request clarification? b.) “I
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believe that the action can be settled for less than the damages claimed.”

10.) The scope of an audit is not restricted when legal counsel’s response to an auditor as a result
of a client’s letter of inquiry limits the response to a.) Matters to which the legal counsel has given
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substantive attention in the form of legal representation.

11.) Which of the following factors most likely would cause a CPA not to accept a new audit
engagement? a.) The prospective client’s unwillingness to permit inquiry of its legal counsel.

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 12.) Which of the following procedures should an auditor perform concerning litigation, claims,
and assessments? d.) Obtain a list from management that discloses all unasserted claims that it
considers to be probable of assertion.

13.) “In connection with an audit of our financial statements, management has prepared, and
furnished to our auditors, a description and evaluation of certain contingencies.” The foregoing
passage most likely is from a(n) a.) Audit inquiry letter to legal counsel.

14.) An auditor should obtain evidence relevant to all the following factors relevant to third-party
litigation against a client except the c.) Jurisdiction in which the matter will be resolved.

15.) 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 b.) Considered to be a scope limitation.

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16.) If deemed necessary, the auditor should request that an audit client send a letter of inquiry to
those attorneys who have been consulted regarding litigation, claims, or assessments. The primary

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reason for this request is to provide b.) Corroborative evidence.

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17.) Management provides the auditor with information regarding litigation, claims, and
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assessments. Which of the following is the auditor’s primary means of initiating action to
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corroborate such information? b.) Request that management prepare a letter of inquiry to legal
counsel with whom management consulted regarding litigation, claims, and assessments.
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18.) A CPA has received legal counsel’s letter in which no significant disagreements with the client’s
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assessments of contingent liabilities were noted. The resignation of the client’s legal counsel
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shortly after receipt of the letter should alert the auditor that a.) Undisclosed unasserted claims
may have arisen.
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19.) Legal counsel’s response to an auditor’s request for information regarding litigation, claims,
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and assessments will ordinarily contain which of the following? a.) An explanation regarding
limitations on the scope of the response.

20.) Which of the following statements extracted from entity’s legal counsel’s letter regarding
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litigation, claims, and assessments most likely would cause the auditor to request clarification? a.)
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“I believe that the plaintiff will have problems establishing any liability.”

21.) Which of the following procedures would an auditor most likely perform to assist in the
evaluation of loss contingencies? c.) Obtaining a letter of audit inquiry from the client’s lawyer.
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22.) Which of the following procedures would an auditor most likely perform regarding litigation?
b.) Discuss with management its policies and procedures for identifying and evaluating litigation.

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 23.) Which of the following procedures most likely would assist an auditor to identify litigation,
claims, and assessments? d.) Read the file of correspondence from taxing authorities.

24.) What is an auditor’s primary method to corroborate information on litigation, claims, and
assessments? c.)Reviewing the response from the client’s legal counsel to a letter of inquiry.

25.) In auditing contingent liabilities, which of the following procedures would an auditor most
likely perform? c.) Read the minutes of the board of directors’ meetings.

26.) The appropriate date for the client to specify as the effective date in the audit inquiry to legal
counsel is d.) As close to the date of the auditor’s report as possible.

27.) A company’s management provided its auditors with information concerning litigation, claims,
and assessments. Which of the following is the auditor’s primary means of corroborating

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management’s information? a.) Inquiring of company’s outside counsel.

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28.) Which of the following procedures should an auditor ordinarily perform regarding subsequent

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events? a.) Read the latest subsequent interim financial statements.

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29.) An auditor should be aware of subsequent events that provide evidence concerning conditions
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that did not exist at year end but arose after year end. These events may be important to the
auditor because they may c.) Require disclosure to keep the financial statements from being
misleading.
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30.) Which of the following procedures will an auditor most likely perform to obtain evidence
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about the occurrence of subsequent events? c.) Inquiring of the entity’s legal counsel concerning
litigation, claims, and assessments arising after year end.

31.) Which of the following procedures would an auditor most likely perform in obtaining evidence
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about subsequent events? d.) Investigate changes in noncurrent debt occurring after year end.
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32.) Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on
Abco’s December 31, Year 1, financial statements on March 6, Year 2, the date of the auditor’s
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report. A subsequently discovered fact requiring revision of the Year 1 financial statements
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occurred on April 10, Year 2, and came to Wilson’s attention on April 24, Year 2. If the fact became
known prior to the report release date, and the revision is made, Wilson’s report ordinarily should
be date d.) Using dual-dating.
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33.) Zero Corp. suffered a loss having a material effect on its financial statements as a result of a
customer’s bankruptcy that rendered a trade receivable uncollectible. This bankruptcy occurred
suddenly because of a natural disaster 10 days after Zero’s balance sheet date but 1 month before
the issuance of the financial statements and the auditor’s report. Under these circumstances, the

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 Financial Statements Should Be Adjusted/Event Requires Financial Statements Disclosure, but No
Adjustment/Auditor’s Report Should Be Modified for a Lack of Consistency: d.) No, Yes, and No.

34.) Which of the following procedures will an auditor most likely perform to obtain evidence
about the occurrence of subsequent events? d.) Inquiring as to whether any unusual adjustments
were made after year end.

35.) In connection with the annual audit, which of the following is not a subsequent events
procedure? c.) Make inquiries with respect to the financial statements covered by the auditor’s
previously issued report if new information has become available during the current audit that
might affect that report.

36.) Harvey, CPA, is preparing an audit plan to determine the occurrence of subsequent events that

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may require adjustment or disclosure essential to a fair presentation of the financial statements in

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accordance with U.S. GAAP. Which one of the following procedures is least appropriate for this

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purpose? a.) Confirm as of the date of the auditor’s report accounts receivable that have

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increased significantly from the year-end date.

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37.) Subsequent events are defined as events that occur subsequent to the c.) Balance sheet date
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but prior to the auditor’s report date.

38.) Which of the following procedures would an auditor most likely perform in obtaining evidence
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about subsequent events? b.) Inquire of management whether new shares have been issued
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since the year end.

39.) 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.) Auditor’s report.
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40.) Which of the following procedures would an auditor most likely perform in obtaining evidence
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about subsequent events? b.) Compare the latest subsequent interim financial information with
the financial statements being reported upon.

41.) Which of the following procedures would an auditor most likely perform to obtain evidence
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about the occurrence of subsequent events? c.) Investigate changes in debt recorded after year
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end.

42.) After an audit report containing an unmodified opinion on a nonissuer’s financial statements
was dated and the financial statements issued, the client decided to sell the shares of a subsidiary
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that accounts for 30% of its revenue and 25% of its net income. The auditor should d.) Take no
action because the auditor has no obligation to make any further inquiries.

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 43.) After the date of the report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless a.)Information,
which existed at the report date and may affect the report, comes to the auditor’s attention.

44.) Which of the following events occurring after the date of the report most likely will cause the
auditor to make further inquiries about the previously issued financial statements? b.) The
discovery of information regarding a contingency that existed before the financial statements
were issued.

45.) Soon after Boyd’s audit report was released, Boyd learned of certain related party transactions
that occurred during the year under audit. These transactions were not disclosed in the notes to
the financial statements. Boyd should c.) Discuss the matter with management.

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46.) On February 25, financial statements were released with an auditor’s report expressing an

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unmodified opinion on the statements for the year ended January 31. On March 2, the CPA learned

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that on February 11, the entity incurred a material loss on an uncollectible trade receivable as a

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result of the deteriorating financial condition of the entity’s principal customer that led to the

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customer’s bankruptcy. Management then refused to adjust the financial statements for this
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subsequent event. The CPA determined that the information is reliable and that creditors are
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currently relying on the financial statements. The CPA’s next course of action most likely is to b.)
Notify management and those charged with governance that the auditor will seek to prevent
future reliance on the auditor’s report.
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47.) Subsequent to the issuance of the financial statements, the auditor became aware of facts
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existing at the report date that would have affected the report had the auditor then been aware of
such facts The auditor most likely should a.) Determine whether persons are relying or likely to
rely on the financial statements who would attach importance to the information.
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48.) Which of the following events occurring after the issuance of the financial statements most
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likely would cause the auditor to make further inquiries about the previously issued financial
statements? c.) New information is discovered concerning undisclosed lease transactions of the
audited period.
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49.) On April 14, Year 2, an auditor expressed an unmodified opinion on the financial statements of
the Emerson Company for the year ended February 28, Year 2. A structural defect in Emerson’s
recently completed plant first appeared in late Year 1, but the auditor did not learn of it until April
25, Year 2. On May 1, Year 2, the auditor learned that the defect would cause material losses to the
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company. The auditor’s primary responsibility is a.) To determine that immediate steps are taken
to inform all parties who are relying on information contained in the statements.

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 50.) The auditor learned of the following situations after issuing the audit report on February 6.
Each is important to users of the financial statements. For which one does the auditor have
responsibility for disclosure of the newly discovered facts? d.) A conflict of interest involving
credit officers and a principal company supplier that existed during the audit year was
discovered on March 3.

51.) As a result of newly discovered facts, an auditor has concluded that action should be taken to
prevent future reliance on the report. (S)he should a.) Advise the client to make appropriate
disclosure of the facts and their impact on the financial statements to persons who are known to
be currently relying or who are likely to rely on the financial statements and the related auditor’s
report.

52.) Which of the following events occurring after the issuance of an auditor’s report most likely

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would cause the auditor to make further inquiries about the previously issued financial

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statements? b.) New information is discovered concerning undisclosed related-party

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transactions of the prior year.

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53.) After issuing an auditor’s report, an auditor has no obligation to make continuing inquiries
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about audited financial statements unless c.)Information that existed at the report date and may
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affect the report comes to the auditor’s attention.

54.) After releasing the auditor’s report, the auditor has no obligation to make any further inquiries
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with respect to audited financial statements covered by that report unless d.) New information is
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discovered concerning undisclosed related party transactions of the previously audited period.
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55.) 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
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include b.) Pro forma financial statement presentation.

56.) 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
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subsequently declined significantly. What is the effect of this event on the year-end statements?
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d.) No financial statement disclosure necessary.

57.) 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
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event on the year-end statements? d.) No financial statement revision.

58.) Subsequent events that provide evidence of conditions that arose subsequent to the date of
the financial statements d.) May require disclosure in notes to the financial statements.

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 59.) Which of the following events occurring after the issuance of the auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements? d.) New information regarding significant unrecorded transactions from the year
under audit is discovered.

60.) Which of the following documentation is required for an audit in accordance with generally
accepted auditing standards? d.) A management representation letter.

61.) A purpose of a management representation letter is to reduce c.) The possibility of a

62.) Which of the following statements ordinarily is included among the written management
representations obtained by the auditor in an audit of a nonissuer? c.) All transactions have been

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recorded in the accounting records.

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63.) To which of the following matters would an auditor not apply materiality limits when obtaining

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specific written management representations? d.) Fraud involving employees with significant
roles in internal control.

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64.) An auditor finds several misstatements in the financial statements that the client prefers not
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to correct. The auditor determines that the misstatements are not material in the aggregate.
Which of the following actions by the auditor is most appropriate? a.) Document all
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misstatements accumulated during the audit and the conclusion about whether uncorrected
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misstatements are material.

65.) Which of the following matters will an auditor most likely include in a management
representation letter? d.) Management’s acknowledgment of its responsibility to detect
employee fraud.
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66.) Which of the following expressions most likely would be included in a representation letter by
management of an issuer? a.) No events have occurred subsequent to the balance sheet date
that require adjustment to, or disclosure in, the financial statements.
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67.) To which of the following matters would materiality limits not apply in obtaining written
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management representations? a.) The availability of minutes of shareholders’ and directors’

68.) Key Co. plans to present comparative financial statements for the years ended December 31,
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Year 1 and Year 2, respectively. Smith, CPA, audited Key’s financial statements for both years and
plans to report on the comparative financial statements on May 1, Year 3. Key’s current
management team was not present until January 1, Year 2. What period of time should be covered
by Key’s management representation letter? b.) January 1, Year 1, through May 1, Year 3.

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 69.) Which of the following auditing procedures is ordinarily performed last? c.) Obtaining a
management representation letter.

70.) When an audit is made in accordance with auditing standards, the auditor should always c.)
Obtain certain written representations from management.

71.) When considering the use of management’s written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations a.)
Complement, but do not replace, substantive procedures designed to support the assertion.

72.) A written representation from a client’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should normally be
signed by the a.) Chief executive officer and the chief financial officer.

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73.) If management refuses to provide certain written representations that the auditor believes are
essential, which of the following is appropriate? c.) The client’s refusal may have an effect on the

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auditor’s ability to rely on other representations of management.

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74.) An auditor should obtain written representations from management about litigation, claims,
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and assessments. These representations may be limited to matters that are considered either
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individually or collectively material provided an understanding on the limits of materiality for this
purpose has been reached by b.) Management and the auditor.
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75.) A written management representation letter is most likely to be an auditor’s best source of
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corroborative information of a client’s intention to d.) Discontinue a line of business.

76.) “We have disclosed to you all known instances of noncompliance or suspected noncompliance
with laws and regulations whose effects should be considered when preparing financial
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statements.” The foregoing passage most likely is from a(n) c.) Management representation letter.
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77.) The date of the management representation letter should be at or near the date of the
c.)Auditor’s report.
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78.) “There have been no communications from regulatory agencies concerning noncompliance
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with, or deficiencies in, financial reporting practices that could have a material effect on the
financial statements.” The foregoing passage is most likely from a c.) Management representation
letter.
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79.) For which of the following matters should an auditor obtain written management
representations? c.) Management’s compliance with contractual agreements that may affect the
financial statements.

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 80.) Which of the following statements ordinarily is not included among the written client
representations made by the chief executive officer and the chief financial officer? a.) “Sufficient
evidence has been made available to the auditor to permit the expression of an unmodified
opinion.”

81.) To which of the following matters would materiality limits not apply when obtaining written
client representations? d.) Instances of fraud involving management.

82.) Which of the following matters most likely would be included in a management representation
letter? c.) A confirmation that the entity has complied with contractual agreements.

83.) Krim, president and CEO of United Co., engaged Smith, CPA, to audit United’s financial
statements so that United could secure a loan from First Bank. Smith expressed an unmodified

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opinion on May 20, but the loan was delayed. On August 5, on inquiry to Smith by First Bank,

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Smith, relying on Krim’s written representation, made assurances that United’s financial status had

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not changed materially. Krim’s representation was untrue because of a material change after May

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20. First relied on Smith’s assurances of no change. Shortly afterward, United became insolvent. If

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First sues Smith for negligent misrepresentation, Smith will likely be found b.) Liable, because
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Smith should have obtained sufficient appropriate audit evidence to verify the status of United.
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84.) Which of the following management roles would typically be acknowledged in a management
representation letter? a.) Management has the responsibility for the design of controls to detect
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fraud.
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85.) Of which of the following matters is a management representation letter required to contain
specific representations? b.) Information concerning fraud by the CFO.
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86.) Which of the following statements is correct regarding a management representation letter?
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c.)The date of the representation letter should typically be the same as the audit report.
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