SOLVED

Learning Objective 24-4 1) 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: A) contingent liabilities. B) subsequent year’s transactions. C) late unusual occurrences. D) subsequent events. 2) Which type of subsequent event requires consideration by management and evaluation by the auditor? A) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered. Yes Yes B) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered. No No C) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered. Yes No D) Subsequent events that have a direct effect on the financial statements and require adjustment. Subsequent events that have no direct effect on the financial statements but for which disclosure is considered. No Yes 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 end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation: A) took place before year-end. B) did not take place until after year-end. C) occurred both before and after year-end. 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) 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: 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 category 1? A) Inquiries 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 transaction 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 category 2? 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) decrease in the value of investments