Question 1

'A potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place contingent on a future event' is the definition of:
A) a long- term liability.
B) contingent liability
C) an accrued liability.
D) a current liability.

Accepted Answer

The definition given matches a contingent liability, which is a potential future obligation that depends on the occurrence or non-occurrence of a future event. Examples include lawsuits, product warranties, or environmental liabilities. A long-term liability is a known obligation that is payable over a period of more than one year, while an accrued liability is a known but unpaid expense that has been incurred but not yet paid. A current liability is a debt that must be paid within one year or a normal operating cycle of a company.

Question 2

If the auditor concludes that it is highly improbable that the client will continue as a going concern, the auditor should, in accordance with ASA 700:
A) issue a disclaimer of opinion.
B) include an emphasis of matter section in the audit report.
C) issue an unqualified report but explain the concerns in the opinion paragraph.
D) express an adverse opinion.

Accepted Answer

If the auditor concludes that it is highly improbable that the client will continue as a going concern, they should express an adverse opinion, as the financial statements are not prepared on a going concern basis, which is a fundamental assumption in financial reporting.

Question 3

Footnote disclosure in the financial statement is necessary if the contingent liability is:
A) Remote.
B) Probable.
C) Reasonably possible.
D) Has occurred.

Accepted Answer

Footnote disclosure is required when the contingent liability is reasonably possible. If the contingency is remote or has occurred, disclosure may not be necessary. If the liability is probable, it must be recognized on the balance sheet as a liability.

Question 4

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that there is sufficient evidence but it does not support a conclusion of fairly presented financial statements, the auditor has two choices:
A) (1) the statements must be revised to the auditor's satisfaction or (2) a disclaimer of opinion must be issued.
B) (1) either a qualified opinion must be issued or (2) an adverse opinion must be issued.
C) (1) either a disclaimer of opinion must be issued or (2) an adverse opinion must be issued.
D) (1) the statements must be revised to the auditor's satisfaction or (2) either a qualified or an adverse opinion must be issued.

Accepted Answer

If the auditor concludes that there is sufficient evidence but it does not support a conclusion of fairly presented financial statements, the auditor has two choices: (1) the statements must be revised to the auditor's satisfaction or (2) either a qualified or an adverse opinion must be issued. The auditor may issue a qualified opinion when the financial statements depart from generally accepted accounting principles and either: (a) the effect of the departure is material, but not pervasive or (b) the effect of the departure is pervasive, but not material overall. Alternatively, the auditor may issue an adverse opinion when the financial statements are materially misstated and the effect of the misstatements is both material and pervasive.

Question 5

Which one of the following is NOT one of the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit?
A) To evaluate the accuracy of the auditing firm's time budget for the engagement
B) To counteract the bias that frequently enters into the auditor's judgement
C) To make sure that the audit meets the firm's standard of performance
D) To evaluate the performance of inexperienced personnel

Accepted Answer

Reviewing working papers at the completion of the audit is not primarily done to evaluate the accuracy of the time budget. The main reasons include ensuring the audit meets the firm's standards, counteracting bias, and evaluating the performance of inexperienced personnel.

Question 6

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that:
A) 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.
B) the auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork.
C) 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.
D) 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.

Accepted Answer

The auditor is responsible for reviewing events occurring after the balance sheet date to ensure that they are properly disclosed or adjusted in the financial statements if they have a material impact.

Question 7

Adjustment of the financial statement may be necessary if the contingent liability is:
A) Remote.
B) Probable.
C) Reasonably possible.
D) None of the above

Accepted Answer

Contingent liabilities that are probable may require adjustment of the financial statement, while those that are remote or reasonably possible would not require adjustment unless disclosure is necessary. Therefore, option B is the correct answer.

Question 8

The subsequent discovery of facts requiring the recall or reissuance of financial statements from developments occurring after the date of the auditor's report.
A) will not arise
B) will certainly arise
C) will probably arise
D) will probably not arise

Accepted Answer

The subsequent discovery of facts requiring the recall or reissuance of financial statements from developments occurring after the date of the auditor's report will not arise.

Question 9

An agreement which commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole is a definition of a:
A) contingent liability.
B) commitment.
C) conditional contract.
D) potentially hazardous agreement.

Accepted Answer

A commitment is an agreement that obligates the firm to undertake specific future actions, regardless of changes in the external environment. A contingent liability is a potential obligation that may arise if certain conditions are met in the future, such as a lawsuit or warranty claim. A conditional contract is a contract that is dependent on the occurrence of a specific event. A potentially hazardous agreement is not a common term in financial or legal contexts.

Question 10

Which one of the following is NOT an audit procedure that is commonly used to search for contingent liabilities?
A) Analyse legal expense for the period under audit.
B) Review the minutes of directors' and shareholders' meetings.
C) Inquiries of management (orally and in writing).
D) Review the current year's tax return.

Accepted Answer

Reviewing the current year's tax return is not a commonly used audit procedure to search for contingent liabilities. Contingent liabilities are potential future obligations that may or may not become actual liabilities, and may not necessarily have a tax impact. The other three options (analysing legal expenses, reviewing minutes, and making inquiries of management) are commonly used procedures for identifying contingent liabilities.

Question 11

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 end of the year. The subsequent information should NOT be incorporated directly into the statements if the conditions causing the change in valuation:
A) did not take place until after year- end.
B) took place before year- end.
C) occurred both before and after year- end.
D) are reimbursable through insurance policies.

Accepted Answer

Subsequent events that occur after the balance sheet date should not be incorporated directly into the financial statements unless they relate to conditions that existed at the balance sheet date. If the conditions causing the change in valuation did not take place until after year-end, this subsequent information should not be incorporated directly into the statements.

Question 12

Which of the following is NOT required to be communicated to the audit committee or similarly designed body under ASA 260?
A) All material irregularities and illegal acts of a material nature
B) Disagreements with management about the scope of the audit, applicability of accounting principles or wording of the audit report
C) Difficulties encountered in performing the audit such as lack of availability of client personnel and failure to provide necessary information
D) Auditor's responsibilities under generally accepted auditing standards, including responsibility for evaluating internal control and the concept of reasonable rather than absolute assurance

Accepted Answer

ASA 260 requires auditors to communicate certain matters to those charged with governance, including disagreements with management and difficulties encountered during the audit. However, all material irregularities and illegal acts of a material nature are typically communicated to management and those charged with governance, but they are not specifically required under ASA 260.

Question 13

After the financial statements have been issued, if a subsequent discovery of facts occurs, that is, the auditor becomes aware that some information in the statements is materially misleading, the auditor should ask the client to issue an immediate revision. This is only required if:
A) the discovery of facts relates to developments that occurred after the date of the auditor's report.
B) management makes the discovery and informs the auditor.
C) the auditor makes the subsequent discovery of facts him or herself.
D) the facts discovered already existed at the audit report date.

Accepted Answer

The auditor should request a revision if the facts discovered existed at the audit report date, as they would have impacted the audit opinion if known earlier.

Question 14

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012. Which one would require an adjustment to the account balances as at 30 June 2012?
A) The auditee will market $2 million of preference shares on 31 July, 2012.
B) Unused equipment recorded at $100 000 at 30 June, 2012 was disposed of on 3 July, 2012 for $60 000.
C) The client disposed of a major subsidiary on 30 July 2012.
D) Inventory valued at $100 000 on 30 June, 2012 was destroyed by a fire on 1 August, 2012.

Accepted Answer

The sale of unused equipment shortly after the balance sheet date for significantly less than its recorded value indicates that the equipment was overvalued as of 30 June 2012, requiring an adjustment to reflect its fair value.

Question 15

A client has a calendar year- end. Listed below are four events that occurred after 31 December. Which one of these subsequent events might result in adjustment of the 31 December financial statements?
A) Settlement of a litigation for a different amount from that recorded in the accounts
B) Collection of 90% of the accounts receivable existing at 31 December
C) Adoption of accelerated depreciation methods
D) Sale of a major subsidiary

Accepted Answer

The settlement of a litigation for a different amount from that recorded in the accounts could result in adjustment of the 31 December financial statements as it may affect the accuracy of the recorded amount for the related account. The other options do not necessarily require adjustment of the financial statements as they relate to events that occurred after the year-end and may not affect the financial position of the company as at 31 December.

Question 16

Which one of the following is a required condition for a contingent liability to exist?
A) The amount of the future payment is known.
B) The outcome has been resolved by a current event.
C) The liability resulted from an existing condition.
D) There is a potential liability to an employee of the client.

Accepted Answer

A contingent liability exists when the liability resulted from an existing condition, but the amount of the future payment or resolution is uncertain and dependent on a future event. Option A is incorrect because the amount of the future payment is uncertain. Option B is incorrect because the outcome has not been resolved yet. Option D is incorrect because the potential liability to an employee may or may not materialize, and it is not a necessary condition for a contingent liability to exist.

Question 17

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:
A) included in the financial statements as an actual liability.
B) disclosed in the auditor's report but not disclosed on the financial statements.
C) disclosed in footnotes but not accrued.
D) neither reported nor disclosed in footnotes.

Accepted Answer

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be included in the financial statements as an actual liability. This is based on the accrual accounting principle that requires companies to recognize expenses and liabilities in the financial statements when they become probable and reasonably estimable. This is also in accordance with Generally Accepted Accounting Principles (GAAP).

Question 18

The auditor needs to perform procedures to satisfy the three categories of audit objectives: transaction- related objectives, balance- related objectives, and - related objectives
A) presentation and disclosure
B) sufficient appropriate
C) financial statement
D) balance day

Accepted Answer

The three categories of audit objectives are transaction-related objectives, balance-related objectives, and presentation and disclosure-related objectives. Therefore, the best choice is A since it specifically addresses the third category. The other answer choices are not related to the three categories of audit objectives.

Question 19

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with applicable accounting standards. Which one of the following procedures would be LEAST appropriate for this purpose?
A) Confirm as of the completion of fieldwork accounts receivable that have increased significantly from the year- end date.
B) Read the minutes of the board of directors' meetings.
C) Inquire of management concerning events that may have occurred.
D) Obtain a legal counsel's letter as of the completion of fieldwork.

Accepted Answer

Confirming accounts receivable that have increased significantly from the year-end date is not directly related to identifying subsequent events that may require adjustment or disclosure.

Question 20

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 postdated footnote.
C) the next scheduled interim visit.
D) the final billing for audit services rendered.

Accepted Answer

The auditor's subsequent events work should be extended to the date of the auditor's report, which is the date that the auditor issues the audit opinion. This ensures that the auditor considers all events that occurred up until the audit opinion was issued.

Quiz 17: Completing the Audit

'A potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place contingent on a future event' is the definition of:

If the auditor concludes that it is highly improbable that the client will continue as a going concern, the auditor should, in accordance with ASA 700:

Footnote disclosure in the financial statement is necessary if the contingent liability is:

If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that there is sufficient evidence but it does not support a conclusion of fairly presented financial statements, the auditor has two choices:

Which one of the following is NOT one of the three main reasons why it is essential that working papers be thoroughly reviewed by another member of the audit firm at the completion of the audit?

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that:

Adjustment of the financial statement may be necessary if the contingent liability is:

The subsequent discovery of facts requiring the recall or reissuance of financial statements from developments occurring after the date of the auditor's report.

An agreement which commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole is a definition of a:

Which one of the following is NOT an audit procedure that is commonly used to search for contingent liabilities?

Which of the following is NOT required to be communicated to the audit committee or similarly designed body under ASA 260?

After the financial statements have been issued, if a subsequent discovery of facts occurs, that is, the auditor becomes aware that some information in the statements is materially misleading, the auditor should ask the client to issue an immediate revision. This is only required if:

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012. Which one would require an adjustment to the account balances as at 30 June 2012?

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

Which one of the following is a required condition for a contingent liability to exist?

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:

The auditor needs to perform procedures to satisfy the three categories of audit objectives: transaction- related objectives, balance- related objectives, and - related objectives

An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of: