CORRECT
Chapter 24
Multiple-Choice Questions
1. Which of the following is not a condition for a contingent liability to exist?
easy a. There is a potential future payment to an outside party that would result from a current
d condition.
b. There is uncertainty about the amount of the future payment.
c. The outcome of an uncertainty will be resolved by some future event.
d. The amount of the future payment is reasonably estimable.
2. Auditors often integrate procedures for presentation and disclosure objectives with:
easy
d
Tests for planning objectives Tests for balance-related objectives
a. Yes Yes
b. No No
c. Yes No
d. No Yes
3. If a potential loss on a contingent liability is remote, the liability usually is:
easy a. disclosed in footnotes, but not accrued.
b 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.
4. Which of the following is an incorrect combination of the “likelihood of occurrence” and
easy financial statement treatment?
c a. Remote: no disclosure.
b. Probable (amount is estimable): financial statements are adjusted.
c. Reasonably possible (amount is estimable): financial statements are adjusted.
d. Probable (amount is not estimable): footnote disclosure is required.
5. One of the auditor’s primary concerns relative to presentation and disclosure-related objectives
easy is:
c a. accuracy.
b. existence.
c. completeness.
d. occurrence.
6. At the completion of the audit, management is asked to make a written statement that it is not
easy aware of any undisclosed contingent liabilities. This statement would appear in the:
d a. management letter.
b. letter of inquiry.
c. letters testamentary.
d. letter of representation.
7. The responsibility for identifying and deciding the appropriate accounting treatment for
easy contingent liabilities rests with a company’s _____.
c a. auditors.
b. legal counsel.
c. management.
d. management and the auditors.
Arens/Elder/Beasley
,8. SFAS 5 describes _____ levels of likelihood of occurrence.
easy a. one
c b. two
c. three
d. four
9. The auditor has a responsibility to review transactions and activities occurring after the year -end
easy to determine whether anything occurred that might affect the statements being audited. The
d 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.
10. Which of the following is not a contingent liability with which an auditor is particularly
easy concerned?
a
Notes receivable discounted Product warranties
a. Yes Yes
b. No No
c. Yes No
d. No Yes
11. Audit procedures related to contingent liabilities are initially focused on:
easy a. accuracy.
d b. completeness.
c. existence.
d. occurrence.
12. Which type of subsequent event requires consideration by management and evaluation by the
easy auditor?
a Subsequent events that have a direct Subsequent events that have no direct
effect on the financial statements and effect on the financial statements but for
require adjustment. which disclosure is considered.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
13. Whenever subsequent events are used to evaluate the amounts included in the statements, care
easy must be taken to distinguish between conditions that existed at the balance sheet date and those
b 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.
14. Auditors will generally send a standard inquiry letter to:
easy a. only those attorneys who have devoted substantial time to client matters during the year.
b b. every attorney that the client has been involved with in the current or preceding year, plus
any attorney the client engages on occasion.
c. those attorneys whom the client relies on for advice related to substantial legal matters.
d. only the attorney who represent the client in proceeding where the client is defendant.
Arens/Elder/Beasley
, 15. Who may identify matters to be included in a letter of inquiry sent to a client’s legal counsel?
easy
a Auditors. Company management.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
16. Which of the following is not one of the three main reasons why it is essential that audit files be
easy thoroughly reviewed by another member of the audit firm at the completion of the audit?
d a. To evaluate the performance of inexperienced personnel.
b. To counteract the bias that frequently enters into the auditor’s judgment.
c. To make sure that the audit meets the CPA firm’s standard of performance.
d. To evaluate the accuracy of the auditing firm’s time budget for the engagement.
17. Which of the following subsequent events is most likely to result in an adjustment to a
easy company’s financial statements?
b 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.
18. With which of the following client personnel would it generally not be appropriate to inquire
easy about commitments or contingent liabilities?
c a. Controller.
b. President.
c. Accounts receivable clerk.
d. Vice president of sales.
19. At what stages of the audit must analytical procedures be used?
easy a. Planning and testing.
c b. Testing and completion.
c. Planning and completion.
d. Planning, testing, and completion.
20. Which of the following procedures and methods are important in assessing a company’s ability
medium to continue as a going concern?
c Discussions with management regarding Reviewing quarter on the internal control
future plans related to sales activities, questionnaire specifically asking the
cost controls, and marketing efforts. client to evaluate the ability to continue.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
21. Inquiries of management regarding the possibility of unrecorded contingencies will be useful in
medium uncovering:
b Management’s intentional failure to When management does not comprehend
disclose existing contingencies. accounting disclosure requirements.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
Arens/Elder/Beasley
Chapter 24
Multiple-Choice Questions
1. Which of the following is not a condition for a contingent liability to exist?
easy a. There is a potential future payment to an outside party that would result from a current
d condition.
b. There is uncertainty about the amount of the future payment.
c. The outcome of an uncertainty will be resolved by some future event.
d. The amount of the future payment is reasonably estimable.
2. Auditors often integrate procedures for presentation and disclosure objectives with:
easy
d
Tests for planning objectives Tests for balance-related objectives
a. Yes Yes
b. No No
c. Yes No
d. No Yes
3. If a potential loss on a contingent liability is remote, the liability usually is:
easy a. disclosed in footnotes, but not accrued.
b 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.
4. Which of the following is an incorrect combination of the “likelihood of occurrence” and
easy financial statement treatment?
c a. Remote: no disclosure.
b. Probable (amount is estimable): financial statements are adjusted.
c. Reasonably possible (amount is estimable): financial statements are adjusted.
d. Probable (amount is not estimable): footnote disclosure is required.
5. One of the auditor’s primary concerns relative to presentation and disclosure-related objectives
easy is:
c a. accuracy.
b. existence.
c. completeness.
d. occurrence.
6. At the completion of the audit, management is asked to make a written statement that it is not
easy aware of any undisclosed contingent liabilities. This statement would appear in the:
d a. management letter.
b. letter of inquiry.
c. letters testamentary.
d. letter of representation.
7. The responsibility for identifying and deciding the appropriate accounting treatment for
easy contingent liabilities rests with a company’s _____.
c a. auditors.
b. legal counsel.
c. management.
d. management and the auditors.
Arens/Elder/Beasley
,8. SFAS 5 describes _____ levels of likelihood of occurrence.
easy a. one
c b. two
c. three
d. four
9. The auditor has a responsibility to review transactions and activities occurring after the year -end
easy to determine whether anything occurred that might affect the statements being audited. The
d 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.
10. Which of the following is not a contingent liability with which an auditor is particularly
easy concerned?
a
Notes receivable discounted Product warranties
a. Yes Yes
b. No No
c. Yes No
d. No Yes
11. Audit procedures related to contingent liabilities are initially focused on:
easy a. accuracy.
d b. completeness.
c. existence.
d. occurrence.
12. Which type of subsequent event requires consideration by management and evaluation by the
easy auditor?
a Subsequent events that have a direct Subsequent events that have no direct
effect on the financial statements and effect on the financial statements but for
require adjustment. which disclosure is considered.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
13. Whenever subsequent events are used to evaluate the amounts included in the statements, care
easy must be taken to distinguish between conditions that existed at the balance sheet date and those
b 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.
14. Auditors will generally send a standard inquiry letter to:
easy a. only those attorneys who have devoted substantial time to client matters during the year.
b b. every attorney that the client has been involved with in the current or preceding year, plus
any attorney the client engages on occasion.
c. those attorneys whom the client relies on for advice related to substantial legal matters.
d. only the attorney who represent the client in proceeding where the client is defendant.
Arens/Elder/Beasley
, 15. Who may identify matters to be included in a letter of inquiry sent to a client’s legal counsel?
easy
a Auditors. Company management.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
16. Which of the following is not one of the three main reasons why it is essential that audit files be
easy thoroughly reviewed by another member of the audit firm at the completion of the audit?
d a. To evaluate the performance of inexperienced personnel.
b. To counteract the bias that frequently enters into the auditor’s judgment.
c. To make sure that the audit meets the CPA firm’s standard of performance.
d. To evaluate the accuracy of the auditing firm’s time budget for the engagement.
17. Which of the following subsequent events is most likely to result in an adjustment to a
easy company’s financial statements?
b 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.
18. With which of the following client personnel would it generally not be appropriate to inquire
easy about commitments or contingent liabilities?
c a. Controller.
b. President.
c. Accounts receivable clerk.
d. Vice president of sales.
19. At what stages of the audit must analytical procedures be used?
easy a. Planning and testing.
c b. Testing and completion.
c. Planning and completion.
d. Planning, testing, and completion.
20. Which of the following procedures and methods are important in assessing a company’s ability
medium to continue as a going concern?
c Discussions with management regarding Reviewing quarter on the internal control
future plans related to sales activities, questionnaire specifically asking the
cost controls, and marketing efforts. client to evaluate the ability to continue.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
21. Inquiries of management regarding the possibility of unrecorded contingencies will be useful in
medium uncovering:
b Management’s intentional failure to When management does not comprehend
disclose existing contingencies. accounting disclosure requirements.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
Arens/Elder/Beasley
