SOLVED

9) Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering: A) Management’s intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. Yes Yes B) Management’s intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No No C) Management’s intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. Yes No D) Management’s intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No Yes 10) Commitments include all but which of the following? A) agreements to purchase raw materials B) pension plans C) agreements to lease facilities at set prices D) Each of the above is a commitment. 11) If an auditor concludes there are contingent liabilities, then he or she must evaluate the: A) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes Yes B) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. No No C) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes No D) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. No Yes 12) Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities at the balance sheet date? A) obtain an attorney’s letter from the client’s attorney B) confirm large accounts payable balances at the balance sheet date C) examine purchase orders issued for several days prior to the close of the year D) compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end 13) If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true? A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. B) Disclosure may be unnecessary if the contingency is highly remote or immaterial. C) Frequently, the CPA firm obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management’s attorneys. D) Answers B and C are correct, but answer A is not. 14) The process of “final evidence accumulation” is always done late in the engagement. Which one of the following would be done the earliest in the engagement? A) final analytical procedures B) search for contingent liabilities C) evaluate the going concern assumption D) acquire the client’s letter of representation 15) A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee? A) Review minutes and resolutions of the board of directors. B) Review prior year’s audit files with respect to such guarantees. C) Review the possibility of such guarantees with the chief accountant. D) Review the legal letter returned by the company’s outside legal counsel. 16) Elise-Greer, LLP is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate’s indebtedness have been detected? A) Send the standard bank confirmation request to all of the client’s lender banks. B) Review client minutes and obtain a representation letter. C) Examine supporting documents for all entries in intercompany accounts. D) Obtain written confirmation of indebtedness from the auditor of the affiliate. 17) Distinguish between contingent liabilities and commitments.