3) Whenever subsequent events are used to evaluate the amounts included in the statements, care
must be taken to distinguish between conditions that existed at the balance sheet date and those
that come into being after the balance sheet date. The subsequent information should not be
incorporated directly into the statements if the conditions causing the change in valuation
A) took place before the balance sheet date.
B) did not take place until after the balance sheet date.
C) occurred both before and after the balance sheet date.
D) are reimbursable through insurance policies.
4) An auditor has the responsibility to actively search for subsequent events that occur
subsequent to the
A) balance sheet date.
B) date of the auditor’s report.
C) balance sheet date, but prior to the audit report.
D) date of the management representation letter.
5) Which of the following subsequent events is most likely to result in an adjustment to a
company’s financial statements?
A) merger or acquisition activities
B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding
accounts receivable balance
C) issuance of common stock
D) an uninsured loss of inventories due to a fire
6) After the balance sheet date, but prior to the issuance of the audit report, the client suffers an
uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The
auditor should
A) adjust the financial statements for the year under audit.
B) add a paragraph to the audit report.
C) advise the client to disclose the event in the notes to the financial statements.
D) advise the client to delay issuing the financial statements until the economic loss can be
determined.
7) The auditor has completed her assessment of subsequent events. The proper accounting for
subsequent events that have a direct effect on the financial statements is to
A) adjust the financial statements for the year under audit.
B) disclose in the notes to financial statement the amount of the adjustment.
C) duly note in the audit workpapers that next year’s financial statements need to be adjusted.
D) make no adjustment of the financial statements for the year under audit.
8) The audit procedures for the subsequent events review can be divided into two categories: (1)
procedures integrated as a part of the verification of year-end account balances, and (2) those
performed specifically for the purpose of discovering subsequent events. Which of the following
procedures is in the first category?
A) Inquire of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Subsequent period sales and purchases transactions are examined to determine whether the
cutoff is accurate.
D) Review journals and ledgers of year 2 to determine the existence of any transactions related to
year 1.
9) The audit procedures for the subsequent events review can be divided into two categories:
(1) procedures normally integrated as a part of the verification of year-end account balances, and
(2) those performed specifically for the purpose of discovering subsequent events. Which of the
following procedures is in the second category?
A) Correspond with attorneys.
B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
C) Subsequent period sales and purchases transactions are examined to determine whether the
cutoff is accurate.
D) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of
lower of cost or market valuation.
10) Which of the following would be a subsequent discovery of facts which would not require a
response by the auditor?
A) discovery of the inclusion of material nonexistent sales
B) discovery of the failure to write off material obsolete inventory
C) discovery of the omission of a material footnote
D) discovery of management’s intent to increase selling prices in the future
11) In connection with the annual audit, which of the following is not a “subsequent events”
procedure?
A) Prepare any necessary closing journal entries.
B) Examine the minutes of stockholders and directors meetings subsequent to the balance sheet
date.
C) Review journals and ledgers.
D) Obtain a letter of representation.
12) An auditor performs interim work at various times throughout the year. The auditor’s
subsequent events work should be extended to the date of
A) the auditor’s report.
B) a post-dated footnote.
C) the next scheduled interim visit.
D) the final billing for audit services rendered.
13) Which event that occurred after the end of the fiscal year under audit but prior to issuance of
the auditor’s report would not require disclosure in the financial statements?
A) sale of a bond or capital stock issue
B) loss of plant or inventories as a result of fire or flood
C) a significant decline in the market price of the corporation’s stock
D) a merger or acquisition
14) Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they could be issued?
A) loss of a plant as a result of a flood
B) sale of long-term debt or capital stock
C) settlement of litigation in excess of the recorded liability
D) major purchase of a business that is expected to double the sales volume
15) If the auditor determines that a subsequent event that affects the current period financial
statements occurred after fieldwork was completed but before the audit report was issued, what
date(s) may the auditor use on the report?
A)
The date of the
original last day of
fieldwork only.
The date of the
subsequent
event only.
The date on which the last day of
fieldwork occurred along with the
date of the subsequent event.
Yes
Yes
No
B)
The date of the
original last day of
fieldwork only.
The date of the
subsequent
event only.
The date on which the last day of
fieldwork occurred along with the
date of the subsequent event.
No
Yes
Yes
C)
The date of the
original last day of
fieldwork only.
The date of the
subsequent
event only.
The date on which the last day of
fieldwork occurred along with the
date of the subsequent event.
No
Yes
No
D)
The date of the
original last day of
fieldwork only.
The date of the
subsequent
event only.
The date on which the last day of
fieldwork occurred along with the
date of the subsequent event.
No
No
Yes
16) An auditor’s decision concerning whether or not to dual date an audit report is primarily
based on the auditor’s decision to
A) extend appropriate audit procedures.
B) assume responsibility for events after the date of the auditor’s report.
C) assume responsibility for event from fiscal year-end to the date of the audit report.
D) roll the dice and hope for a successful outcome.
17) The auditor’s responsibility for “reviewing the subsequent events” of a public company that
is about to issue new securities is normally limited to the period of time
A) beginning with the balance sheet date and ending with the date of the auditor’s report.
B) beginning with the start of the fiscal year under audit and ending with the balance sheet date.
C) beginning with the start of the fiscal year under audit and ending with the date of the auditor’s
report.
D) beginning with the balance sheet date and ending with the date the registration statement
becomes effective.
18) Subsequent events affecting the realization of assets ordinarily will require an adjustment of
the financial statements under examination because such events typically represent
A) the culmination of conditions that existed at the balance sheet date.
B) additional new information related to events that were in existence on the balance sheet date.
C) final estimates of losses relating to casualties occurring in the subsequent events period.
D) preliminary estimate of losses relating to new events that occurred subsequent to the balance
sheet date.
19) An auditor’s decision concerning whether or not to “dual date” the audit report is based upon
the auditor’s willingness to
A) extend auditing procedures and assume responsibility for a greater period of time.
B) accept responsibility for subsequent events.
C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the
auditor’s report.
D) assume responsibility for events subsequent to the issuance of the auditor’s report.
20) Auditors of accelerated filer public companies
A) are responsible for reviewing subsequent events for a period of up to six months after the
balance sheet date.
B) must always dual-date their audit reports.
C) must inquire about and consider any information about subsequent events that materially
affects the effectiveness of internal control over financial reporting.
D) must perform all of the above procedures.
21) A client has a calendar year-end. Listed below are four events that occurred after
December 31. Which one of these subsequent events might result in adjustment of the
December 31 financial statements?
A) sale of a major subsidiary
B) adoption of accelerated depreciation methods
C) write-off of a substantial portion of inventory as obsolete
D) collection of 90% of the accounts receivable existing at December 31
22) The auditor’s responsibility with respect to events occurring between the balance sheet date
and the end of the audit examination is best expressed by which of the following statements?
A) The auditor is fully responsible for events occurring in the subsequent period and should
extend all detailed procedures through the last day of fieldwork.
B) The auditor is responsible for determining that a proper cutoff has been made and performing
a general review of events occurring in the subsequent period.
C) The auditor’s responsibility is to determine that a proper cutoff has been made and that
transactions recorded on or before the balance sheet date actually occurred.
D) 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.
23) The fieldwork for the December 31, 2016 audit of Schmidt Corporation ended on March 17,
2017. The financial statements and auditor’s report were issued on March 29, 2017. In each of
the material situations (1 through 5) below, indicate the appropriate action (a, b, c). The possible
actions are as follows
a. Adjust the December 31, 2016 financial statements.
b. Disclose the information in a footnote in the December 31, 2016 financial statements.
c. No action is required.
The situations are as follows:
________ 1. On March 1, 2017, one of Schmidt Corporation’s major customers declared
bankruptcy. The customer’s financial condition in 2016 was deteriorating and they owed Schmidt
Corporation a large sum of money as of the balance sheet date.
________ 2. On February 17, 2017, Schmidt Corporation sold some machinery for its book
value.
________ 3. On February 20, 2017 a flood destroyed the entire uninsured inventory in one of
Schmidt’s warehouses.
________ 4. On January 5, 2017, there was a significant decline in the market value of the
securities held for resale from their value as of the balance sheet date.
________ 5. On March 10, 2017, the company settled a lawsuit at an amount significantly higher
than the amount recorded as a liability on the books as of the balance sheet date.
24) State the two primary types of subsequent events that require consideration by management
and evaluation by the auditor, and give two examples of each type.
25) The issuance of bonds by the client subsequent to the balance sheet date would require a
footnote disclosure in, but no adjustment to, the financial statements under audit.
26) Subsequent events which require adjustment to the financial statements provide additional
information about significant conditions/events which did not exist at the balance sheet date.
27) When subsequent events are used to evaluate the amounts included in the year-end financial
statements, auditors must distinguish between conditions that existed at the balance sheet date
and those that came into being after the balance sheet date.
28) The auditor’s responsibility for reviewing subsequent events is normally limited to thirty
days after the balance sheet date.
1) The date of the management representation letter received from the client should
A) be the date of latest subsequent event disclosed in the notes to the financial statements.
B) be dated no earlier than the date of the audit report.
C) have the same date as the date of the balance sheet.
D) have the same date as the date of the engagement letter.
2) Which of the following procedures and methods are important in assessing a company’s
ability to continue as a going concern?
A)
Discussions with management regarding
potential financial difficulties
Evaluation of management’s plans to
avoid bankruptcy
Yes
Yes
B)
Discussions with management regarding
potential financial difficulties
Evaluation of management’s plans to
avoid bankruptcy
No
No
C)
Discussions with management regarding
potential financial difficulties
Evaluation of management’s plans to
avoid bankruptcy
Yes
No
D)
Discussions with management regarding
potential financial difficulties
Evaluation of management’s plans to
avoid bankruptcy
No
Yes
3) The letter of representation obtained from an audit client should be
A) dated as of the end of the period under audit.
B) dated as of the audit report date.
C) dated as of any date decided upon by the client and auditor.
D) dated as of the issuance of the financial statement.
4) When should auditors generally assess a client’s ability to continue as a going concern?
A) upon completion of the audit
B) during the planning stages of the audit
C) throughout the entire audit process
D) during testing and completion phases of the audit
5) Which of the following would the auditor expect to find in the client’s management
representation letter?
A) management’s recommendations for internal control effectiveness improvements
B) management’s plans for improving product quality
C) management’s compliance with contractual arrangements that impact the financial statements
D) management’s goals for improving earnings per share
6) Auditing standards require that the auditor evaluate whether there is a substantial doubt about
a client’s ability to continue as a going concern for at least
A) one quarter beyond the balance sheet date.
B) one quarter beyond the date of the auditor’s report.
C) one year beyond the balance sheet date.
D) one year beyond the date of the auditor’s report.
7) Auditing standards require auditors to evaluate whether there is substantial doubt about a
client’s ability to continue as a going concern. One of the most important audit procedures to
perform to assess the going concern question is
A) analytical procedures.
B) confirmations from creditors.
C) statistical sampling procedures.
D) tests of internal controls.
8) Which of the following statements regarding the letter of representation is not correct?
A) It is prepared on the client’s letterhead.
B) It is addressed to the CPA firm.
C) It is signed by high-level corporate officials, usually the president and chief financial officer.
D) It is optional, not required, that the auditor obtain such a letter from management.
9) Refusal by a client to prepare and sign the representation letter would require the auditor to
issue a(n)
A) qualified opinion or a disclaimer of opinion.
B) adverse opinion or a disclaimer of opinion.
C) qualified or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.
10) A management representation letter is
A) prepared on the CPA’s letterhead.
B) addressed to the client.
C) signed by high-level corporate officials.
D) dated as of the balance sheet date.
11) Which of the following is correct regarding supplementary information?
A) The auditor must express an opinion on the supplementary information.
B) When reporting on supplementary information, the auditor uses a different materiality
threshold from that used in forming an opinion on the basic financial statements.
C) If the auditor’s report on the audited financial statements contains an adverse opinion, the
auditor can still issue an unqualified opinion on the supplementary information.
D) The auditor can issue a separate report on the supplementary information; it does not need to
be part of the report on the financial statements.
12) Which of the following is not one of the categories of items included in the letter of
representation?
A) subsequent events
B) completeness of information
C) recognition, measurement, and disclosure
D) materiality
13) Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity’s ability
to continue as a going concern?
A) review compliance with the terms of debt agreements
B) confirmation of accounts receivable from principal customers
C) reconciliation of interest expense with debt outstanding
D) confirmation of bank balances