Question 1

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 category 1?

Accepted Answer

Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. This is a procedure that is integrated as a part of the verification of year-end account balances. The cutoff accuracy ensures that transactions have been recorded in the appropriate period, and it is important for the accuracy of year-end balances.

Question 2

A significant customer of the firm suffers a large economic loss after year end, but prior to completion of field work. The audit client believes this event will have material effect on the financial statements. The auditor should:

Accepted Answer

Advising the client to disclose the event in the notes to the financial statements is the best course of action. This is in line with the principle of disclosure, where material information should be disclosed in the financial statements to ensure they are not misleading. Adjusting the financial statements or delaying the issuance of the financial statements are not necessary, as this event only occurred after year end and the financial statements are still accurate as of that date. Adding a paragraph to the audit report may not be sufficient to convey the materiality of the event, and it is better to disclose it in the notes to the financial statements.

Question 3

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

Accepted Answer

Reviewing available interim financial statements is not a subsequent events procedure, but rather a normal audit procedure. The other options listed are specific subsequent events procedures that auditors must perform.

Question 4

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

Accepted Answer

Subsequent events are those that occur between the balance sheet date and the audit report date. Of the options given, option A refers to a subsequent event as it pertains to a contingent liability. Management must evaluate the likelihood of the liability, and the auditor must assess the adequacy of any related disclosure. Therefore, it requires consideration by management and evaluation by the auditor. Options B, C, and D do not refer to subsequent events.

Question 5

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:

Accepted Answer

Subsequent events that occur after the year-end should not be incorporated directly into the financial statements because they were not known or existed at the balance sheet date. Therefore, only option B is correct. Options A, C, and D are not correct because conditions that existed before year-end or both before and after year-end may require adjustment or disclosure in the financial statements, and reimbursable insurance claims are also relevant to the valuation of the financial statements.

Question 6

In a standard inquiry of client's attorney letter, the attorney is requested to communicate about contingencies up to the balance sheet date.

Accepted Answer

The answer of In a standard inquiry of client's attorney...

Question 7

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

Settlement of litigation in excess of the recorded liability would require an adjustment to the financial statements as it would result in an increase in expenses and a decrease in liabilities. The other options do not necessarily require an adjustment to the financial statements before they can be issued.

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 accurately presented and reflect the most up-to-date information. Disclosure in the notes or audit workpapers is not sufficient as it does not reflect the true financial position of the company. Therefore, option A is the best choice.

Question 9

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 subsequent events work should be extended to the date of the auditor's report. This is to ensure that any events that occur between the end of the reporting period and the date of the auditor's report are appropriately disclosed in the financial statements.

Question 10

If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, current professional standards require that the auditor consider the refusal as a scope limitation.

Accepted Answer

This is in line with the requirements of Generally Accepted Auditing Standards (GAAS) that the auditor should obtain sufficient appropriate audit evidence to support the financial statements, and a scope limitation may impact the auditor's ability to obtain such evidence.

Question 11

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

Accepted Answer

A decrease in the value of investments is a subsequent discovery that does not require a response by the auditor as it is a normal occurrence in the investment market. On the other hand, options A, B, and C are all material misstatements that require a response by the auditor, such as issuing a modified audit opinion or adjusting the financial statements.

Question 12

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 dual-date approach on the report, indicating both the date the financial statements were completed (which is before the subsequent event) and the date the subsequent event occurred. The date format for the dual-date approach is month-day-year (e.g. 11eaa634_0cd9_5062_842f_2d500910b440_TB2671_00).

Question 13

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

Accepted Answer

When a customer declares bankruptcy, it is likely that the company will have to adjust its financial statements to reflect the loss from the outstanding accounts receivable balance. The other events listed may not necessarily result in a need to adjust the financial statements. A merger or acquisition may require some adjustments to the financial statements, but not always. Issuance of common stock typically does not require an adjustment to the financial statements, as it is a financing activity. And an uninsured loss due to a fire may result in a write-off of inventory but may not necessarily require an adjustment to the financial statements.

Question 14

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 in the case of a public company that is about to issue new securities is normally 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 the registration statement must include audited financial statements for a period that ends no earlier than 135 days before the registration statement becomes effective. Therefore, the auditor's responsibility for subsequent events extends until the date the registration statement becomes effective.

Question 15

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 16

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 category 2?

Accepted Answer

Corresponding with attorneys is a procedure specifically performed to discover subsequent events, as it can help identify any potential legal claims or contingencies that have arisen after the year-end. The other options listed are procedures that are normally integrated as part of the verification of year-end account balances.

Question 17

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

Accepted Answer

The auditor has a responsibility to actively search for subsequent events that occur between the balance sheet date and prior to the date of the audit report. This is because such events could have a material impact on the financial statements and require adjustment or disclosure. The management representation letter does not affect the auditor's responsibility for subsequent events.

Question 18

Which of the following is not a reason why the auditor requests that the client provide a letter of representation?

Accepted Answer

A letter of representation is not considered higher quality evidence than other forms of evidence, such as external confirmations or documentation. It is used to confirm oral responses and fulfill auditing standards, but it is not superior in quality.

Question 19

The auditor has a responsibility to review transactions and activities occurring after the year-end 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 term used for reviewing transactions and activities occurring after the year-end is "subsequent events." Therefore, the correct choice is D. A is incorrect because it refers to a specific type of subsequent event, not the general review of events. B and C are incorrect because they are not commonly used terms in accounting/auditing for reviewing post-year-end transactions.

Question 20

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 considered a non-adjusting event as it does not provide evidence of conditions that existed at the balance sheet date.

Quiz 24: Completing the Audit