Question 1

In connection with the annual audit, which of the following is not a "subsequent events" procedure?

Accepted Answer

The preparation of closing journal entries is not a subsequent events procedure. Subsequent events procedures are steps taken to identify and evaluate events or transactions that occur subsequent to the balance sheet date but before the financial statements are issued. These procedures may include reviewing journals and ledgers, examining minutes of stockholders and directors meetings, and obtaining a letter of representation. However, preparing closing journal entries is part of the normal year-end closing process and is not specific to subsequent events.

Question 2

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

Accepted Answer

The auditor's subsequent events work should be extended to the date of the auditor's report to ensure that all material subsequent events are disclosed and appropriately reflected in the financial statements.

Question 3

Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent:

Accepted Answer

The answer of Subsequent events affecting the realization of assets...

Question 4

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?

Accepted Answer

Corresponding with attorneys is a specific procedure performed for the purpose of discovering subsequent events, such as pending litigation or claims. The other procedures listed are part of the normal verification of year-end account balances. Testing the collectability of accounts receivable, examining subsequent period sales and purchases transactions, and comparing subsequent-period purchase prices of inventory with recorded cost are all procedures that are integrated as a part of the verification of year-end account balances.

Question 5

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?

Accepted Answer

The examination of subsequent period sales and purchases transactions to determine whether the cutoff is accurate is part of the verification of year-end account balances. Option A relates to specific inquiries made to the client for discovering subsequent events. Option B is a letter of representation that is obtained from the client as part of the audit process, but it does not pertain directly to the subsequent events review. Option D involves a review of transactions from year 2 to determine their relationship with year 1, which is not part of the year-end account balance verification process.

Question 6

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:

Accepted Answer

The auditor's responsibility for reviewing subsequent events of a public company that is about to issue new securities is limited to the period of time beginning with the balance sheet date and ending with the date the registration statement becomes effective. This is because investors rely on the financial statements included in the registration statement, and the auditor's report thereon, in making investment decisions. Therefore, the auditor must ensure that any subsequent events occurring between the balance sheet date and the date the registration statement becomes effective are appropriately reflected in the financial statements or otherwise disclosed in the filing.

Question 7

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?

Accepted Answer

A significant decline in the market price of the corporation's stock is a subsequent event that does not require disclosure in the financial statements because it represents a subsequent event that occurred after the end of the fiscal year, but it does not affect the financial statements. The other events listed, such as the sale of a bond or capital stock issue, loss of plant or inventories, or a merger or acquisition, would all require disclosure in the financial statements as they could materially affect the financial statements.

Question 8

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:

Accepted Answer

The proper accounting for subsequent events that have a direct effect on the financial statements is to adjust the financial statements for the year under audit. This ensures that the financial statements are accurate and reflect the most up-to-date information available. Disclosing in the notes or noting in the workpapers is not sufficient to ensure accuracy in the financial statements. Making no adjustment would result in misleading financial statements.

Question 9

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:

Accepted Answer

The auditor should advise the client to disclose the event in the notes to the financial statements as it is a material loss. Adjusting the financial statements or delaying the issuance of the statements is not necessary. Adding a paragraph to the audit report may be appropriate if the disclosure is not made in the notes, but advising the client to make the disclosure first is the best course of action.

Question 10

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?

Accepted Answer

The settlement of litigation in excess of the recorded liability provides additional evidence about conditions that existed at the balance sheet date, requiring an adjustment to the financial statements.

Question 11

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited.The procedures required to verify these transactions are commonly referred to as the review for:

Accepted Answer

The review of transactions and activities occurring after the balance sheet date is referred to as a review for subsequent events. This is a standard audit procedure to ensure that any material events occurring after the balance sheet date are properly disclosed or adjusted for in the financial statements. Contingent liabilities, late unusual occurrences, and subsequent year's transactions may also be reviewed as part of the subsequent events review process. However, the term "subsequent events" is the most appropriate and specific term used to describe this audit procedure.

Question 12

An auditor has the responsibility to actively search for subsequent events that occur subsequent to the:

Accepted Answer

Auditors are responsible for searching for subsequent events that occur between the balance sheet date and the audit report date. This is because such events may have a material impact on the financial statements and require disclosure or adjustment. The auditor does not have a responsibility to search for events that occur after the audit report date or before the balance sheet date. The management representation letter is obtained as part of the audit process and is not a relevant date for searching for subsequent events.

Question 13

An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to:

Accepted Answer

Dual dating an audit report is used when an auditor extends audit procedures after the original date of the audit report. This allows the auditor to limit the responsibility for events occurring after the original report date to those specific events addressed by the extended procedures.

Question 14

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?

Accepted Answer

The auditor may use the date of the subsequent event disclosure in the financial statements or the date of the auditor's report, whichever is later. Choice B represents the date of the report, which is later than the date the subsequent event occurred.

Question 15

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:

Accepted Answer

Dual dating occurs when the auditor extends the audit procedures and assumes responsibility for a greater period of time. This may occur when the financial statements are issued or available for distribution after a subsequent event occurs but before the auditor's opinion is expressed. The dual date represents the last date up to which the auditor has obtained sufficient evidence to support his or her opinion. By dual dating the report, the auditor is taking responsibility for the financial statements up to the extended audit procedures.

Question 16

Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?

Accepted Answer

The discovery of management's intent to increase selling prices in the future would not require a response by the auditor as it is not a material misstatement or omission in the financial statements. However, the other options (A, B, and C) all involve material misstatements or omissions that would require a response by the auditor.

Question 17

Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?

Accepted Answer

The bankruptcy of a customer with an outstanding accounts receivable balance is an event that provides additional evidence about conditions that existed at the balance sheet date, requiring an adjustment to the financial statements to reflect the potential uncollectibility of the receivable.

Question 18

Which type of subsequent event requires consideration by management and evaluation by the auditor?

Accepted Answer

The answer of Which type of subsequent event requires consideration...

Question 19

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:

Accepted Answer

Subsequent information that did not exist at the balance sheet date and only comes into being after that date should not be incorporated directly into the statements. Therefore, option B is the correct choice. The other options do not correctly describe the conditions for incorporation of subsequent events into financial statements.

Question 20

After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless:

Accepted Answer

The best choice is D. According to auditing standards, if an auditor becomes aware of new information which may have affected the report and if the financial statements are still available, the auditor should apply revised procedures as necessary and consider whether it is necessary to modify the original report. The other choices may require additional audit procedures as well, but they do not necessarily require a modification to the original audit report.

Quiz 24: Completing the Audit