Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 24 Completing the Audit

Learning objective 24-1
5) 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.
FALSE
Explain: They are primarily satisfying the audit objective of classification and
understandability.

6) 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.
TRUE
Explain: This phase ensures that all information is accurately presented and adequately
disclosed in the financial statements

7) Auditors approach obtaining evidence for presentation and disclosure objectives differently
with how they approach obtaining evidence for transaction-related and balance-related
objectives.
FALSE
Explain: Auditor approach obtaining additional evidence for presentation and disclosure
objectives consistent with the approach to obtaining evidence for transaction and balance
objectives. (đổi differently thành consistent)

8) Often, procedures for the presentation objectives are integrated with the auditor's tests for
transaction-related and balance-related audit objectives.
TRUE
Explain: Because the information required for presentation and disclosure often arises from the
same transactions and balances being tested.

9) 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.
TRUE
Explain : Financial statement users have a clear and accurate understanding of the entity’s
financial position and the nature of its receivables.

10) 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.
TRUE.
Explain : These steps help ensure that the financial statements include all required and accurate
disclosures.

11) Audit tests performed in earlier audit phases often provide sufficient appropriate evidence
about contingent liabilities and subsequent events.
FALSE
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Explain: (viết lại câu hỏi, thêm ‘do not’). These areas often require specific procedures due to
their unique nature.

18) A lawsuit has been filed against your client. If, in the opinion of legal counsel, the likelihood
of your client will lose the lawsuit is remote, no financial statement accrual or disclosure of the
potential loss would generally be required.
TRUE
Explain: According to accounting standards, a lawsuit should only be accrued if:
 It is probable that the liability will occur.
 The amount of the loss can be reasonably estimated.

19) Current professional auditing standards make it clear that management, not the auditor, is
responsible for identifying and deciding the appropriate accounting treatment for contingent
liabilities.
TRUE
Explain: Management is responsible for identifying and deciding the appropriate accounting
treatment for contingent liabilities.

20) Many of the audit procedures for finding contingencies are usually performed as an integral
part of various segments of the audit rather than as a separate activity near the end of the audit.
TRUE
Explain: By applying these procedures into the ongoing audit work, auditors can more
effectively identify potential contingencies

21) The probability threshold for dealing with uncertainty in loss contingencies uses the terms
likely and unlikely.
FALSE
Explain: Uses the terms probable, reasonably possible, and remote rather than "likely" and
"unlikely

22) The first stop in the audit of contingencies is to determine the amount of the contingency.
FALSE
Explain: not to determine the amount of the contingency but rather to identify the existence of
potential contingencies

23) A lawsuit has been filed but has not yet been resolved against an audit client. This lawsuit
does not meet the conditions required for contingent liability.
FALSE
Explain: Viết lại câu, “This lawsuit may meet….”

24) Financial statement disclosure is required if the likelihood of occurrence of an event is

probable, reasonably possible, or remote.
FALSE
Explain: Đổi or remote thành but not if it is remote

25) Auditing standards make it clear that the auditor is responsible for identifying and deciding
the appropriate accounting treatment for contingent liabilities due to the complexity of this topic.
FALSE
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Explain: Management - not the auditor

26) Companies ordinarily describe all commitments either in a separate footnote or combine
them with a footnote related to contingencies.
TRUE
Explain: Because companies are required by accounting standards (such as GAAP or IFRS) to
describes commitments in their financial statement footnotes

27) Distinguish between contingent liabilities and commitments.

Contingent liabilities are potential future obligations to an outside party for an unknown amount
resulting from activities that have already taken place. Commitments are agreements that an
entity will hold to a fixed set of conditions in the future regardless of what happens to profits or
the economy.

28) Define the term contingent liability and discuss the criteria accountants and auditors use to
classify these accounting events.
Contingent liability is a potential future obligation to an outside party for an unknown amount
resulting from activities that have already taken place. Three conditions are required for a
contingent liability to exist: (1) there is a potential future payment to an outside party or the
impairment of an asset that resulted from an existing condition; (2) there is uncertainty about the
amount for the future payment or impairment; and (3) the outcome will be resolved by some
future event or events. Accounting standards describe three levels of likelihood of occurrence
and the appropriate financial statement treatment for each likelihood as follows:

- Probable—future event likely to occur and amount can be reasonably estimated then the
financial statement accounts are adjusted. If the amount cannot be reasonably estimated,
then a footnote disclosure is necessary.

- Reasonably possible chance of occurring is more than remote, but less than probable.
Footnote disclosure is necessary.

- Remote chance of occurrence is slight, no disclosure is necessary.

29) With what types of contingencies might an auditor be concerned?

- Pending litigation for patent infringement,
- Income tax dispute,
- Product warranties,
- Notes receivable discounted,
- Guarantees of obligations of others,
- Unused balances of outstanding lines of credit

30) What are the three required conditions for a contingent liability to exist?
- There is a potential future payment to an outside party
- The amount is uncertain
- The outcome will be resolved by a future event

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31) An environmental clean-up lawsuit is pending against your client. What information about
the lawsuit would you as the auditor need to determine the proper accounting treatment?
The first step is to determine if a contingency exists. Three conditions are required for a
contingent liability to exist:
(1) there is a potential future payment to an outside party or the impairment of an asset that
resulted from an existing condition.
(2) there is uncertainty about the amount for the future payment or impairment.
(3) the outcome will be resolved by some future event or events.
Since the lawsuit meets the criteria for a contingent liability, the next step is to evaluate the
significance of the potential liability, and the nature of the disclosure needed in the financial
statements to obtain evidence about the occurrence and right and obligations presentation and
disclosure objective. Accounting standards describe three levels of likelihood of occurrence and
the appropriate financial statement treatment for each likelihood as follows:
a. Probable future event likely to occur and amount can be reasonably estimated then the
financial statement accounts are adjusted. If the amount cannot be reasonably estimated, then a
footnote disclosure is necessary.

b. Reasonably possible chance of occurring is more than remote, but less than probable. Footnote
disclosure is necessary.

c. Remote-chance of occurrence is slight. No disclosure is necessary.

32) Discuss three audit procedures commonly used to search for contingent liabilities.
- Inquire of management (orally and in writing) about the possibility of unrecorded
contingencies.

- Review current and previous years' internal revenue agent reports for income tax
settlements.

- Review the minutes of directors' and stockholders' meetings for indications of lawsuits or
other contingencies.

- Analyze legal expenses for the period under audit, and review invoices and statements
from legal counsel for indications of contingent liabilities. (answer 33)

- Obtain a letter from each major attorney performing legal services for the client as to the status
of pending litigation or other contingent liabilities.

- Review audit documentation for any information that may indicate a potential contingency.

- Examine letters of credit in force as of the balance sheet date and obtain confirmation of the
used and unused balances.

33) Describe some audit procedures commonly used to search for contingent liabilities.

24.3 Learning Objective 24-3

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10) When preparing a standard inquiry to the client's attorney letter, the client's letterhead should
be used, and the letter should be signed by the client company's officials.
TRUE
Explain: This helps the lawyer recognize that the communication is coming from his or her
client and maintain confidentiality.

11) In a standard inquiry to the client's attorney letter, the attorney is requested to communicate
about contingencies up to the balance sheet date.
FALSE
Explain: This ensures the auditors receive information available that could impact the financial
statements.

12) 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.
TRUE
Explain: It may restrict the auditor's ability to obtain sufficient appropriate audit evidence

13) The standard letter sent by the auditor to the attorney requests the attorney communicate
about contingencies up to approximately the date of the auditor's report.
TRUE
Explain: The auditor has the most current information about potential liabilities or claims that
could affect the financial statements before issuing the audit opinion.

14) Attorneys must report material violations of federal securities laws to the company's audit
committee.
TRUE
Explain: Significant legal or regulatory issues are brought to the attention of the audit
committee, which plays a key oversight role.

15) The American Bar Association has refused to amend its attorney-client confidentiality rules
to permit attorneys to breach confidentiality if a client is committing a crime or fraud.
FALSE
Explain: This reflects a balance between preserving confidentiality and preventing significant
harm due to client misconduct.

16) Attorneys in recent years have become reluctant to provide certain information to auditors
because of their own exposure to legal liability for providing incorrect or confidential
information. State the two main reasons that attorneys refuse to provide the auditors with
complete information.
- The attorneys refuse to respond due to a lack of knowledge about matters involving
contingent liabilities.
- The attorneys refuse to disclose information that they consider confidential.

17) State three items that should be included in a standard inquiry to the client's attorney letter.
 A list including (1) pending threatened litigation and (2) asserted or unasserted claims or
assessments with which the attorney has had significant involvement. This list is typically
prepared by management, but management may request that the attorney prepare the list.
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  A request that the attorney furnish information or comment about the progress of each
item listed, the legal action the client intends to take, the likelihood of an unfavorable
outcome, and an estimate of the amount or range of the potential loss.

 A request for the identification of any unlisted pending or threatened legal actions or a
statement that the client's list is complete.

 A statement informing the attorney of his or her responsibility to inform management of

legal matters requiring disclosure in the financial statements and to respond directly to
the auditor,

24.4 Learning Objective 24-4

23) The issuance of bonds by the client subsequent to the balance sheet date would require a
footnote disclosure in, but no adjustment to, the financial statements under audit.
TRUE
Explain: This informs users of the financial statements about significant events that occurred
after the reporting period but before the issuance of the financial statements.

24) Subsequent events which require adjustment to the financial statements provide additional
information about significant conditions/events which did not exist at the balance sheet date.
FALSE
Explain: ……. existed at the balance sheet date, not conditions that did not exist.

25) When subsequent events are used to evaluate the amounts included in the year-end financial
statements, auditors must distinguish between conditions that existed at the balance sheet date
and those that came into being after the balance sheet date.
TRUE
Explain: This process ensures the financial statements reflect accurate and complete information
about the company’s financial position and operations.

26) The auditor's responsibility for reviewing subsequent events is normally limited to thirty
days after the balance sheet date.
FALSE
Explain: …. up to the date of the auditor's report—not just 30 days after the balance sheet date.

27) When the auditor's name is associated with a registration statement under the Securities Act
of 1933, the auditor's responsibility for reviewing subsequent events is limited to the date of
auditor's report, not to the date the registration becomes effective.
FALSE
Explain: …. does extend to the date the registration becomes effective, not just the date of the
auditor's report

28) If the auditor is unable to determine the effect of a subsequent event on the effectiveness of
internal control at year-end, the auditor must give an adverse opinion on internal control over
financial reporting.
TRUE
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Explain: This is because the auditor cannot form a conclusion on whether the internal controls
were effective

29) An example of a non-recognized subsequent event which may require disclosure if it is

significant is the issuance of bonds or equity securities by a company.
TRUE.
Explain: It is an example of a non-recognized subsequent event that may require disclosure if it
is significant.
31) State the two primary types of subsequent events that require consideration by management
and evaluation by the auditor and give two examples of each type.
1. Events that occur after the balance sheet date which provide additional information to
management that helps them determine the fair presentation of account balances as of the
balance sheet date. Information about these events helps auditors in verifying the balances. These
events have a direct effect on the financial statements and require adjustment. Examples include
declaration of bankruptcy by a customer with an outstanding accounts receivable balance due to
deteriorating financial condition; settlement of litigation at an amount different from the amount
recorded on the books; and the disposal of equipment not being used in operations at a price
below the current book value.

2. Events that have no direct effect on the financial statements but for which disclosure is
required. Subsequent events of this type are events that provide evidence about conditions which
did not exist at the date of the balance sheet being reported on but arose after the balance sheet
date and may be significant enough to require disclosure. Examples include a decline in the
market value of securities held for temporary investment or resale; issuance of bonds or equity
securities; a decline in the market value of inventory because of government action barring
further sale of a product; the uninsured loss of inventories because of fire; and a merger or an
acquisition.

24.5 Learning Objective 24-5

19) Current professional auditing standards require the performance of analytical procedures
during the planning and completion phases of the audit.
TRUE
Explain: These procedures help auditors gather and evaluate evidence, ensuring the audit is
thorough and reliable.

20) Current professional auditing standards mandate the use of analytical procedures during the
testing phase of the audit.
FALSE
Explain: Current professional auditing standards do not mandate the use of analytical
procedures during the testing phase of the audit.

21) Auditing standards require the auditor's assessment of going concern issues.
TRUE
Explain: It is a crucial part of the audit process to ensure that financial statements are prepared
on a sound basis.

22) Results from the final analytical procedures may indicate that additional audit evidence is
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necessary.
TRUE
Explain: This may ensure that the financial statements are free from material misstatements.

23) Although the letter of representation is typed on the client's letterhead and signed by the
client, it is common for the auditor to prepare the letter.
TRUE
Explain: The auditor typically drafts the letter to ensure that it covers all necessary
representations regarding the financial statements
24) Auditors of public companies must obtain certain representations from management
regarding internal control over financial reporting.
TRUE
Explain: They are crucial for the auditor to form an opinion on the adequacy of internal controls
and to ensure that the financial statements are free from material misstatement.

25) At the completion of the audit, management is typically asked to make a written statement as
a part of the engagement letter that it is aware of no undisclosed contingent liabilities.
FALSE
Explain: The engagement letter outlines the terms of the audit, including the auditor's
responsibilities but it is not where management typically confirms awareness of undisclosed
contingent liabilities.

26) Auditors are required to obtain a letter of representation that describes management's planned
solutions to all internal control weaknesses identified during an audit.
FALSE
Explain: ... are not required…….

27) The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's
chief executive officer, and signed by the audit engagement partner.
FALSE
Explain: It is typically typed on the client's letterhead and is signed by management, usually
(CEO) or (CFO).

28) If the client refuses to prepare and sign a letter of representation, the auditor would be
required to issue either a qualified opinion or a disclaimer of opinion.
TRUE
Explain: It confirms that management is responsible for the financial statements and make sure
that they have disclosed all relevant information

29) Because a management representation letter is a written statement from a non-independent

source, it cannot be regarded as reliable evidence.
TRUE
Explain: It is considered less reliable evidence because it comes from a non-independent source
—the client’s management.

30) An example of the use of data analytics at the end of the audit is using software to scan
unusual journal entries that may require additional consideration by the auditor of their potential
impact on the year-end financial statements.
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TRUE
Explain: The auditor can identify transactions that appear out of the ordinary and could
potentially impact the year-end financial statements.

31) Accounting standards generally require the financial statements to be prepared on the
assumption an entity will continue its operations for a reasonable amount of time.
TRUE
Explain: This means that the company is expected to continue its operations and meet its
obligations as they come due

32) The Financial Accounting Standards Board (FASB) describes a reasonable period of time as
two years after the date the financial statements are issued for management to evaluate the
entity's ability to continue as a going concern.
FALSE
Explain: …. one year from the date the financial statements are issued

33) The accounting standards state that management is responsible to evaluate the entity's ability
to continue as a going concern within one year after the date the financial statements are issued.
TRUE
Explain: This helps ensure transparency about the entity's financial health and informs users
about potential risks

34) The Securities and Exchange Commission has established regulations about the presentation
of non-GAAP financial measures included in financial statements which include such measures
should be relevant and reliable measures that do not mislead investors.
TRUE
Explain: The SEC enforces these rules to enhance investor confidence and promote fair and
accurate financial reporting.

35) What two steps must an auditor take if they have reservations about the audit client
continuing as a going concern?
- Evaluate management's plan to avoid bankruptcy.
- Determine the feasibility of management achieving those plans.

36) State the three purposes of the management representation letter.

- To impress upon management its responsibility for the assertions in the financial
statements
- To remind management of potential misstatements or omissions in the financial
statements
- To document the responses from management to inquiries about various aspects of the
audit
37) List four specific matters that should be included in a client representation letter.
- Management's acknowledgment of its responsibility for the fair presentation of the
financial statements
- Management's belief that the financial statements are fairly presented in conformity with
applicable accounting standards
- Availability of all financial records and related data
- Completeness and availability of all minutes of meetings of stockholders, directors, and
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 committees of directors
- Absence of unrecorded transactions
- Management's belief that the effects of any uncorrected financial statement misstatements
are immaterial to the financial statements
- Information concerning fraud involving (a) management, (b) employees who have
significant roles in internal control, or (c) others where fraud could have a material effect
on the financial statements
- Information concerning related-party transactions and amounts receivable or payable to
related parties
- Unasserted claims or assessments that the entity's lawyer has advised are probable of
assertion and must be disclosed in accordance with accounting standards
- Bankruptcy of a major customer with an outstanding account receivable at the balance
sheet date
- A merger or acquisition after the balance sheet date
38) Besides the search for contingent liabilities and the review for subsequent events, the auditor
has five important final evidence accumulation responsibilities, all of which are required by
current professional auditing standards. Discuss each of these four responsibilities.
- Final analytical procedures performed as a final review for material misstatements or
financial problems and to help the auditor take a final objective look at the financial
statements.
- Evaluate the going concern assumption.
- Obtain a management representation letter documenting management's most important
oral representations during the audit.
- Consider supplementary information included in published annual reports pertaining
directly to the financial statements.
39) The accounting standards require management to evaluate an entity's ability to continue as a
going concern within one year after the date the financial statements are issued. Describe the two
steps management is required to perform in performing this evaluation.

24.6 Learning Objective 24-6

5) An independent review must be performed of all audits.

FALSE
Explain: ….is not required for all audits, though it is mandatory for certain types of audits
6) If, during the completion phase of the audit, the auditor determines that he or she has not
obtained sufficient evidence to draw a conclusion about the fairness of the client's financial
statements, there are two choices: accumulate additional evidence or issue either a qualified or an
adverse opinion.
FALSE
Explain: … the auditor has the following options:
- Accumulate Additional Evidence:
- Issue a Disclaimer of Opinion (Not a Qualified or Adverse Opinion)
7) After performing all audit procedures in each area, the auditor must integrate the results into
an overall conclusion about the financial statements.
TRUE
Explain: .... which communicates the results of the audit and the auditor’s opinion on the
financial statements.
9) List the three reasons why an experienced member of the audit firm must thoroughly review
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audit documentation at the completion of the audit.
- To evaluate the performance of inexperienced personnel
- To make sure that the audit meets the CPA firm's standard of performance
- To counteract the bias that often enters the auditor's judgment
24.7 Learning Objective 24-7

6) Auditors are required to communicate either orally or in writing with the audit committee
about internal control weaknesses.
FALSE
Explain: Auditors are required to communicate deficiencies and material weaknesses in internal
control in writing to the audit committee
7) The Sarbanes-Oxley Act includes additional communication requirements for auditors of
public companies.
TRUE
Explain: … particularly in the areas of internal control over financial reporting and auditor
independence.
8) Client representation letters are required by professional auditing standards, whereas
management letters are optional.
TRUE
Explain:
- Client Representation Letters: Required by auditing standards (e.g., AICPA, PCAOB).
- Management Letters: Optional, but commonly issued by auditors.
9) PCAOB auditing standards require the auditor to communicate key audit matters or critical
audit matters in the standard unqualified audit report.

10) AICPA reporting standards do not require the communication of key audit matters but do
provide guidance for how to communicate these matters if the terms of the engagement require
such disclosure.

11) List the four principal purposes of the required communication with the audit committee
regarding certain additional information obtained during the audit.
- To communicate auditor responsibilities in the audit of financial statements
- To provide an overview of the scope and timing of the audit
- To provide those charged with governance with significant findings arising during the
audit
- To obtain from those charged with governance information relevant to the audit

24.8 Learning Objective 24-8

2) If an auditor discovers that previously issued financial statements are misleading, the most
desirable approach to follow is to request that the client issue an immediate revision of the
financial statements containing an explanation of the reasons for the revision.
TRUE
Explain: This process helps ensure transparency and maintain the integrity of financial
reporting.
3) Subsequent discoveries of facts requiring the reissuance of financial statements arise from
events occurring after the date of the auditor's report.

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FALSE
Explain: …. but before the financial statements are issued or publicly available

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