Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
A. Inspect checks included with the client’s cutoff bank statement.
B. Apply ratio analysis on the current year’s liability accounts.
C. Read the file of correspondence from taxing authorities.
D. Obtain a letter of representations from the client’s underwriter of securities.
Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting?
A conversation with those charged with governance to discuss matters pertaining to financial reporting.
Final analytical procedures are generally intended to
provide the auditor with a final, overall evaluation of the relationships among financial statement balances
Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
review compliance with the terms of debt agreements
Which of the following matters should an auditor communicate to those charged with governance?
significant audit adjustments and
managements consultations with other accountants
Working papers are reviewed at __________ supervisory level(s) of a CPA firm.
Managers and partners typically review at the __________ of the engagement timeline.
Concurring partners are often concerned with __________ control standard compliance.
Reviewers are concerned that the __________ all tie together.
Reviewers are concerned if immaterial passed misstatements have a __________ material effect.
An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide:
corroboration of the information furnished by management concerning litigation, claims, and assessments.
Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor’s report would be most likely to cause the auditor to make further inquiries about the financial statements?
The discovery of information regarding a contingency that existed before the financial statements were issued.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor’s report?
Examine relevant internal audit reports issued during the subsequent period.
Type I subsequent events involve events that existed __________ the balance sheet date.
Type I subsequent events require __________ of the financial statements.
Type II subsequent events come into existence __________ the balance sheet date.
Type II subsequent events occur after the balance sheet date but __________ the completion of fieldwork.
Type I subsequent events come into existence due to new __________ becoming available.
An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor’s responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was:
limited to the specific event referenced
An auditor would be most likely to identify a contingent liability by obtaining a(n):
letter from the entity's general legal counsel
The CPA's opinion on the __________ of the financial statements may be changed by subsequent events.
Many subsequent events may involve the settling of __________.
Type 2 subsequent events come into existence __________ the balance sheet date.
Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be __________.
Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? "We believe that the action can be settled for less than the damages claimed." This answer is correct because the statement that the likely settlement is less than claimed is very general and
may or may not involve a material amount. Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments? Read the file of correspondence from taxing authorities. “In connection
with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies.” The forgoing passage most likely is from a(n) Audit
inquiry letter to legal counsel. This answer is correct because an audit inquiry letter to the legal counsel includes such a sentence. An attorney responding to an auditor as a result of the client’s letter of audit inquiry may appropriately limit the response to Matters to which the attorney has given substantive attention in the form of legal consultation or representation. This answer is correct
because the professional standards state that an attorney may appropriately limit his response to matters to which he has given substantive attention in the form of legal consultation or representation. A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of
the letter should alert the auditor that Undisclosed unasserted claims may have
arisen. This answer is correct because the auditor is concerned with obtaining from the client’s lawyer corroborating evidence concerning information furnished by management regarding litigation, claims, and assessments. The resignation of the client’s lawyer may indicate the development of a conflict between the client and the lawyer regarding undisclosed unasserted claims. However, the lawyer is required to consider resigning in such a circumstance. Accordingly, the auditor should
inquire as to the nature of the lawyer’s resignation. An auditor would be most likely to identify a contingent liability by obtaining a(n) Lawyer’s letter. This
answer is correct because lawyers often address contingent liabilities relating to their clients. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? "I believe that the plaintiff will have problems establishing any liability." This answer is correct because this statement is unclear and does not help the auditors to determine
whether such legal matters have been properly reported. Bookmark currently added. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements. The requirement is to identify the procedure that is not performed regarding litigation, claims, and assessments. Answer (b) is correct because the CPA does not confirm directly with the client's lawyer that all claims have been recorded in the financial statements. Answers (a), (c), and (d) are all incorrect because they represent information obtained
from management regarding litigation, claims, and assessments as summarized in AU-C 501. Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? "I believe that the action can be settled for less than the damages claimed
"We believe that the possible liability to the company is nominal in amount."
"We believe that the action can be settled for less than
the damages claimed."
"We believe that the plaintiff's case against the company is without merit."
"We believe that the company will be able to defend this action successfully."
Inspect checks included with the client’s cutoff bank statement.
Obtain a letter of representations from the client’s underwriter of securities.
Apply ratio analysis on the current year’s liability accounts.
Read the file of correspondence
from taxing authorities.
This Answer is Correct
This answer is correct because information on litigation, claims and assessments relating to various tax issues may be presented in correspondence from taxing authorities.
Audit inquiry letter to legal counsel.
Management representation letter.
Audit committee’s communication to the auditor.
Financial statement footnote disclosure.
Items which have high probability of being resolved to the client’s detriment.
Asserted claims and pending or threatened
litigation.
Legal matters subject to unsettled points of law, uncorroborated information, or other complex judgments.
Matters to which the attorney has given substantive attention in the form of legal consultation or representation.
Undisclosed unasserted claims may have arisen.
The attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments.
The auditor should begin a completely new examination of contingent liabilities.
An adverse opinion will be necessary.
Accounts payable confirmation.
Transfer agent confirmation.
Lawyer’s letter.
Related-party transaction confirmation.
"I believe that the plaintiff will have problems establishing any liability."
"I believe that this action has only a remote
chance in establishing any liability."
"I believe that the plaintiff’s case against the company is without merit."
"I believe that the company will be able to defend this action successfully."
EVID-0142B
Use V-O keys to navigate.Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?
Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be
disclosed.
Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.
Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.
Obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.
"I believe that the possible liability to the company is nominal in amount."
"I believe that the action can be settled for less than
the damages claimed."
"I believe that the plaintiff's case against the company is without merit."
"I believe that the company will be able to defend this action successfully."
The requirement is to identify the lawyer's letter comment that is most likely to cause the auditor to request clarification. Answer (b) is correct because a statement that the action can be settled for less than the damages claimed is unclear as to the details of the attorney's belief. Answers (a), (c), and (d) are all incorrect because they represent responses that may be clearly interpreted by the auditor. See AU-C 501 for information on assessing lawyer's evaluations of the likely outcome of litigation.
The letter
of audit inquiry addressed to the client’s legal counsel will not ordinarily be
Sent to a lawyer who was engaged by the audit client during the year and soon thereafter resigned the engagement.
A source of corroboration of the information originally obtained from management concerning litigation, claims, and assessments.
Limited to references concerning only pending or threatened litigation with respect to which the lawyer has been engaged.
Needed during the audit of clients whose
securities are not registered with the SEC.
Limited to references concerning only pending or threatened litigation with respect to which the lawyer has been engaged.
This answer is correct because the letter of audit inquiry will not be limited to references concerning only pending or threatened litigation. Such a letter will seek information on claims, litigation, assessments, and unasserted claims, as well as on pending or threatened litigation.
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?
A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement
lawsuit.
A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.
An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
This Answer is Correct
This answer is correct (least likely) because the auditor, not the attorney, makes a judgment on going concern statu
Which of the following is an audit procedure that an auditor most likely would perform
concerning litigation, claims, and assessments?
Request the client's lawyer to evaluate whether the client's pending litigation, claims, and assessments indicate a going concern problem.
Examine the legal documents in the client's lawyer's possession concerning litigation, claims, and assessments to which the lawyer has devoted substantive attention.
Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and
assessments.
Confirm directly with the client's lawyer that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.
Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.
The requirement is to identify the audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments. Answer (c) is correct because auditors must discuss with management its policies and procedures for evaluating and accounting for litigation, claims and assessments. See AU-C 501 for this and other requirements. Answer (a) is incorrect because the client' lawyer is not ordinarily asked to make an assessment about whether the client has a going concern problem (see AU-C 570) for information on an auditor's consideration of a client's ability to continue as a going concern). Answer (b) is incorrect because an auditor will not ordinarily examine legal documents in the client's lawyer's possession. Answer (d) is incorrect because an auditor will not ordinarily confirm with the client's lawyer that all litigation, claims, and assessment have been recorded.
In auditing contingent liabilities, which of the following procedures would an auditor
most likely perform?
Confirm the details of outstanding purchase orders.
Apply analytical procedures to accounts payable.
Read the minutes of the board of directors' meetings.
Perform tests of controls on the cash disbursement activities.
Read the minutes of the board of directors' meetings.
This answer is correct because reading the minutes of board of directors' meetings may reveal contingent liabilities such as litigation facing the firm, or other possible losses.
What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?
Examining legal invoices sent by the client’s attorney.
Verifying attorney-client privilege through interviews.
Reviewing the response from the client’s lawyer to a letter of audit
inquiry.
Reviewing the written representation letter obtained from management.
Reviewing the response from the client’s lawyer to a letter of audit inquiry.
This answer is correct because the professional standards outline an approach in which auditors obtain information from a client’s lawyer to corroborate client information on litigation, claims, and assessments.
The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered
Grounds for an adverse opinion.
A limitation on the scope of the audit.
Reason to withdraw from the engagement.
Equivalent to a significant deficiency.
A limitation on the scope of the audit.
The requirement is to identify the correct statement concerning the refusal of a client's attorney to provide information requested in an inquiry letter. Answer (b) is correct because AU-C 501 indicates that this is a limitation on the scope of the audit. Answer (a) is incorrect because the lack of information is unlikely to lead to an adverse opinion since no information has been provided indicating that the financial statements are misstated. Answer (c) is incorrect because withdrawal is not generally necessary due to the client's attorney's failure to provide information. Answer (d) is incorrect because significant deficiencies pertain to weaknesses in internal control.
Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to
provide
Information concerning the progress of cases to date.
Corroborative audit evidence.
An estimate of the dollar amount of the probable loss.
An expert opinion as to whether a loss is possible, probable, or remote.
Corroborative audit evidence.
This answer is correct because a letter of audit inquiry to the client’s lawyer is the auditor’s primary means of obtaining corroboration of the information furnished by management concerning litigation, claims, and assessments.
The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is a
Letter of audit inquiry to the client’s lawyer.
Letter of corroboration from the auditor’s lawyer upon review of the legal documentation.
Confirmation of claims and assessments
from the other parties to the litigation.
Confirmation of claims and assessments from an officer of the court presiding over the litigation.
Letter of audit inquiry to the client’s lawyer.
This answer is correct because a letter of audit inquiry to the client’s lawyer is the auditor’s primary means of obtaining corroboration of the information furnished by management concerning litigation, claims, and assessments.
An auditor will ordinarily examine invoices from lawyers primarily in order to
Substantiate accruals.
Assess the legal ramifications of litigation in progress.
Estimate the dollar amount of contingent liabilities.
Identify possible litigation, claims, and assessments.
Identify possible litigation, claims, and assessments.
This answer is correct because an auditor may learn of litigation, claims, and assessments on which an attorney has worked when the attorney lists them on an invoic
A lawyer’s response to an auditor’s request for information concerning litigation, claims, and assessments will ordinarily contain which of the
following?
An explanation regarding limitations on the scope of the response.
A statement of concurrence with the client’s determination of which unasserted possible claims warrant specification.
Confidential information which would be prejudicial to the client’s defense if publicized.
An assertion that the list of unasserted possible claims identified by the client represents all such claims of which the lawyer may be aware.
An explanation regarding limitations on the scope of the response.
This
An auditor should obtain audit evidence relevant to all the following factors concerning third-party litigation against a client except the
Period in which the underlying cause for legal action occurred.
Probability of an unfavorable outcome.
Jurisdiction in
which the audit evidence will be resolved.
Existence of a situation indicating an uncertainty as to the possible loss.
Jurisdiction in which the audit evidence will be resolved.
This answer is correct because it is least relevant since in most cases such jurisdictional information will not be considered.
The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to
Matters to which the attorney has given substantive attention in the form of legal representation.
An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
The attorney's opinion of the entity's historical experience in recent similar
litigation.
The probable outcome of asserted claims and pending or threatened litigation.
Matters to which the attorney has given substantive attention in the form of legal representation.
The requirement is to identify the appropriate limitation for an attorney's response to a client's letter of audit inquiry. Answer (a) is correct because AU-C 501 states that an attorney may appropriately limit his response to matters to which s/he has given substantive attention in the form of legal consultation or representation. Answers (b), (c), and (d) are incorrect because AU-C 501 presents a variety of other requests in addition to information on the likelihood of an unfavorable outcome of the matters disclosed by the entity, similar litigation, and probable outcomes.
Which of
the following procedures would an auditor most likely perform regarding litigation?
Confirm directly with the clerk of the court that the client’s litigation is properly disclosed.
Discuss with management its policies and procedures for identifying and evaluating litigation.
Inspect the legal documents in the client’s lawyer’s possession regarding pending litigation.
Confirm the details of pending litigation with the client’s adversaries’ legal representatives.
Discuss with management its policies and procedures for identifying and evaluating litigation.
This answer is correct because the professional standards require that the auditor discuss with management its policies and procedures for identifying and evaluating litigation.
Which of the following procedures
should an auditor perform concerning litigation, claims, and assessments?
Inspect legal documents in the possession of the client’s lawyer that are relevant to pending litigation and unasserted claims and assessments.
Discuss with the client’s lawyer its philosophy of defending litigation, claims, and assessments that have a high probability of being resolved unfavorably.
Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been properly recorded
in the financial statements.
Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.
Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.
This answer is correct because the lawyer is ordinarily required to inform management of such unasserted claims, but the lawyer is not required to inform the auditor; thus, it is particularly important for the auditors to obtain assurance from management that such unasserted claims have been disclosed.
A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the
client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?
The auditor and the client's management.
The client's audit committee and the lawyer.
The client's management and the lawyer.
The lawyer and the auditor.
The lawyer and the auditor.
This Answer is Correct
The lawyer and the auditor is
incorrect. It is the client and the auditor who should reach an understanding about materiality. This understanding is then communicated to the attorney who will limit his/her response accordingly.
The scope of an audit is not restricted when an attorney's response to an auditor, as a result of a client's letter of audit inquiry, limits the response to
Matters to which the attorney has given substantive
attention in the form of legal representation.
An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
The attorney's opinion of the entity's historical experience in recent similar litigation.
The probable outcome of asserted claims and pending or threatened litigation.
Matters to which the attorney has given substantive attention in the form of legal representation.
A lawyer may appropriately limit the response to matters to which the lawyer has given substantive attention in the form of legal consultation or representation.
Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?
Obtain assurance from management that it has disclosed
all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.
Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.
Inquire about and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.
Obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet
date.
Confirm directly with the client's lawyer that all claims have been recorded in the financial statements
The auditor would NOT confirm with the attorney that ALL claims have been recorded in the financial statements. All claims do not require recording and the attorney would not have knowledge of what had been recorded in the financial statements.
The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered
Grounds for an adverse opinion.
A limitation on the scope of the audit.
Reason to withdraw from the engagement.
Equivalent to a significant deficiency.
A limitation on the scope of the audit.
The refusal of a client's attorney to provide information requested in an inquiry letter is considered a limitation on the scope of the audit. It would result in a disclaimer or a qualified opinion.
What is an auditor's primary method to corroborate information on litigation, claims, and assessments?
Examining legal invoices sent by the client's attorney.
Verifying attorney-client privilege through
interviews.
Reviewing the response from the client's lawyer to a letter of audit inquiry.
Reviewing the written representation letter obtained from management.
Reviewing the response from the client's lawyer to a letter of audit inquiry.
The auditor will often seek to obtain an attorney's letter, as that provides some of the primary evidence supporting litigation, claims, and assessments. Note that the question indicates that the auditor is corroborating information. The auditor first obtains the information from the client. That information is then corroborated by the information obtained from the attorney.
Which of the following statements, extracted from a client's lawyer's letter concerning litigation, claims, and assessments, would be most likely to cause the
auditor to request clarification?
"We believe that the possible liability to the company is nominal in amount."
"We believe that the action can be settled for less than the damages claimed."
"We believe that the plaintiff's case against the company is without merit."
"We believe that the company will be able to defend this action successfully."
"We believe that the action can be settled for less than the damages claimed."
This comment is extremely vague and clarification would be required. What exactly would this mean? In litigation, settlements are always less than the damages claimed! This is part of the negotiation process
Which of the following procedures would be most likely to assist an auditor in identifying litigation, claims, and assessments?
Inspect
checks included with the client's cut-off bank statement.
Obtain a letter of representations from the client's underwriter of securities.
Apply ratio analysis on the current-year's liability accounts.
Read the file of correspondence from taxing authorities.
Read the file of correspondence from taxing authorities.
You Answered Correctly!
A taxing authority could
impose an assessment on an entity related to tax matters. The auditor might then identify the existence of such an assessment by reviewing correspondence between the entity and the taxing authority.
A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements.
Which parties should reach an understanding on the limits of materiality for this purpose?
The auditor and the client's management.
The client's audit committee and the lawyer.
The client's management and the lawyer.
The lawyer and the auditor.
The auditor and the client's management.
The client and the auditor should reach an understanding about materiality. This understanding is then communicated to the attorney who will limit his/her response accordingly.
In auditing contingent liabilities, which of the following procedures would an auditor be most likely to perform?
Confirm the details of outstanding purchase orders.
Apply analytical procedures to accounts payable.
Read the minutes of the board of directors' meetings.
Perform tests of controls on the
cash disbursement activities.
Read the minutes of the board of directors' meetings.
Issues that are significant to the entity (for example, litigation issues that result in contingent liabilities) normally rise to the level of discussion by those charged with governance. The auditor routinely reads the minutes of these meetings to identify issues that have financial reporting implications, including issues related to contingent liabilities.
The primary source of information to be reported about litigation, claims, and assessments is the
Client's lawyer.
Court records.
Client's management.
Independent auditor.
Client's management.
Management is the primary source of information about litigation, claims, and assessments. The information provided by management is corroborated by the client's lawyer.