Question 1

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?
A) controller
B) president
C) accounts receivable clerk
D) vice president of sales

Accepted Answer

The accounts receivable clerk is not typically involved in the company's financial management and decision-making processes, so they may not have sufficient knowledge or authority regarding commitments or contingent liabilities. It would be more appropriate to inquire with higher-level personnel such as the controller, president, or vice president of sales who are typically involved in financial management and decision-making processes.

Question 2

A commitment is best described as
A) an agreement to commit the firm to a set of fixed conditions in the future.
B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.
C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.
D) a potential future obligation to an outside party for an as yet to be determined amount.

Accepted Answer

A commitment is an agreement to commit the firm to a set of fixed conditions in the future, regardless of profitability or current market conditions. It is a clear and specific obligation to an external party.

Question 3

If a potential loss on a contingent liability is remote, the liability usually is
A) disclosed in footnotes, but not accrued.
B) neither accrued nor disclosed in footnotes.
C) accrued and indicated in the body of the financial statements.
D) disclosed in the auditor's report but not disclosed on the financial statements.

Accepted Answer

When a potential loss on a contingent liability is considered remote, generally accepted accounting principles (GAAP) do not require the liability to be accrued or disclosed in the footnotes of the financial statements. This approach is based on the principle that the financial statements should not be overloaded with information about events that are unlikely to occur.

Question 4

Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?
A) auditors
B) legal counsel
C) management
D) management and the auditors

Accepted Answer

Management has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities. Legal counsel may advise on the legal aspects of the liability, but management is responsible for determining the appropriate accounting treatment. Auditors may provide their opinion on the adequacy of the disclosure related to the contingent liability, but they do not make the decision on the appropriate accounting treatment.

Question 5

Audit tests performed in earlier audit phases often provide sufficient appropriate evidence about contingent liabilities and subsequent events.

Accepted Answer

Audit tests performed in earlier phases primarily focus on the transactions and balances up to the balance sheet date. Contingent liabilities and subsequent events require specific attention and procedures after the balance sheet date to identify and evaluate events that may affect the financial statements.

Question 6

You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to
A) accrue a $4 million liability.
B) disclose a liability and provide a range of outcomes.
C) since there is less than a 50% chance of occurrence, ignore.
D) since there is greater that a remote chance of occurrence, accrue the $10 million.

Accepted Answer

The appropriate financial statement treatment in this situation is to disclose a liability and provide a range of outcomes. Accruing a liability or ignoring the potential loss would not be appropriate since the likelihood of the loss is significant enough to warrant disclosure. However, since the amount and timing of the loss are uncertain, a range of outcomes should be provided.

Question 7

An example of a presentation and disclosure-related objective is determining that current and noncurrent receivables are classified, separately, and any factoring or discounting of notes receivable is disclosed.

Accepted Answer

This objective is related to presentation and disclosure of receivables, specifically ensuring that they are classified correctly and any related factoring or discounting is disclosed properly.

Question 8

Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering
A) 
B) 
C) 
D)

Accepted Answer

The answer of Inquiries of management regarding the possibility of...

Question 9

Which of the following is a contingent liability with which an auditor is particularly concerned?
A) 
B) 
C) 
D)

Accepted Answer

A contingent liability is a potential liability that may or may not occur, depending on the outcome of a future event. An auditor is particularly concerned with contingent liabilities that are probable and reasonably estimable. Choice A describes a legal claim against the company, which meets both of these criteria and would be a contingent liability of concern to the auditor. Choices B, C, and D do not provide enough information to determine if they are contingent liabilities, or if they are probable and reasonably estimable.

Question 10

Which of the following is an accurate statement regarding presentation and disclosure?
A) Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes.
B) Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events.
C) Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum.
D) In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards.

Accepted Answer

In phase IV of the audit, auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards. This includes ensuring that all required disclosures are included in the footnotes and that the disclosures are presented clearly and accurately. Option A is incorrect, as auditors cannot set the risk of non-disclosure to zero. Option B is incorrect, as contingency and subsequent events require special consideration and detailed testing. Option C is incorrect, as tests of controls related to disclosures are required regardless of the initial assessment of control risk.

Question 11

The auditor's primary concern relative to presentation and disclosure-related objectives is
A) accuracy.
B) existence.
C) completeness.
D) occurrence.

Accepted Answer

The auditor's primary concern with presentation and disclosure-related objectives is completeness. This involves ensuring that all necessary information is provided and presented fairly and accurately in the financial statements. Accuracy, existence, and occurrence are concerns related to other objectives such as valuation, ownership, and classification.

Question 12

Due to the unique nature of disclosures related to contingent liabilities and subsequent events, auditors often assess the risk as high that all required information may not be completely disclosed in the footnotes.

Accepted Answer

Contingent liabilities and subsequent events are often complex and require careful evaluation by auditors. Due to their unique nature, there is a high risk that all necessary information may not be disclosed in the footnotes. Therefore, auditors must exercise caution when evaluating these disclosures to ensure that they are adequate and complete.

Question 13

An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied?
A) accuracy and valuation
B) occurrence and rights and obligations
C) completeness
D) classification and understandability

Accepted Answer

This process ensures that the amounts reported for long-term debt are accurate and properly valued, aligning with the accuracy and valuation audit objective. It involves verifying that the figures presented in the financial statements are correct and supported by adequate documentation.

Question 14

As part of phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation and disclosure-related objectives.

Accepted Answer

In phase IV, auditors evaluate the evidence obtained in the first three phases and perform additional procedures as necessary to ensure the accuracy and completeness of financial statement presentation and disclosures.

Question 15

Often, procedures for the presentation objectives are integrated with the auditor's tests for transaction-related and balance-related audit objectives.

Accepted Answer

This statement is true. The auditor's procedures for presenting objectives are often combined with their tests for transaction-related and balance-related audit objectives to ensure that all relevant information has been gathered and analyzed.

Question 16

Which of the following is not considered a commitment?
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.

Accepted Answer

Each of the choices (A, B, and C) involve a contractual obligation or promise to perform, which are typically considered commitments in accounting and finance. Therefore, none of them represent the correct answer. As a result, the correct option is D because it states that none of the options presented are true.

Question 17

Auditors often integrate procedures for presentation and disclosure objectives with
A) 
B) 
C) 
D)

Accepted Answer

The answer of Auditors often integrate procedures for presentation and...

Question 18

Audit procedures related to contingent liabilities are initially focused on
A) accuracy.
B) completeness.
C) existence.
D) occurrence.

Accepted Answer

The answer of Audit procedures related to contingent liabilities are...

Question 19

Auditors approach obtaining evidence for presentation and disclosure objectives different with how they approach obtaining evidence for transaction-related and balance-related objectives.

Accepted Answer

The answer of Auditors approach obtaining evidence for presentation and...

Question 20

When an auditor reviews the financial statements to determine if assets are properly classified between current and noncurrent, he or she is satisfying the audit objective of occurrence and rights and obligations.

Accepted Answer

The auditor is satisfying the audit objective of classification and understandability, not occurrence and rights and obligations, which relate to whether transactions actually occurred and whether the entity has the rights to or obligations for the assets and liabilities.

Quiz 24: Completing the Audit

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities?

A commitment is best described as

If a potential loss on a contingent liability is remote, the liability usually is

Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities?

Audit tests performed in earlier audit phases often provide sufficient appropriate evidence about contingent liabilities and subsequent events.

You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to

An example of a presentation and disclosure-related objective is determining that current and noncurrent receivables are classified, separately, and any factoring or discounting of notes receivable is disclosed.

Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering

Which of the following is a contingent liability with which an auditor is particularly concerned?

Which of the following is an accurate statement regarding presentation and disclosure?

The auditor's primary concern relative to presentation and disclosure-related objectives is

Due to the unique nature of disclosures related to contingent liabilities and subsequent events, auditors often assess the risk as high that all required information may not be completely disclosed in the footnotes.

An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied?

As part of phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit to determine whether they should perform additional procedures for presentation and disclosure-related objectives.

Often, procedures for the presentation objectives are integrated with the auditor's tests for transaction-related and balance-related audit objectives.

Which of the following is not considered a commitment?

Auditors often integrate procedures for presentation and disclosure objectives with

Audit procedures related to contingent liabilities are initially focused on

Auditors approach obtaining evidence for presentation and disclosure objectives different with how they approach obtaining evidence for transaction-related and balance-related objectives.

When an auditor reviews the financial statements to determine if assets are properly classified between current and noncurrent, he or she is satisfying the audit objective of occurrence and rights and obligations.