Study Unit 13 Gleim Questions with
verified answers
During an audit, an auditor discovers lawsuits filed against a client. Which of the following
would be the next action taken by the auditor?
A.) Disclose the contingent liability in a footnote to the financial statements.
B.) Accrue the liability.
C.) Have the client assess the degree of probability of an unfavorable outcome for the company.
D.) Determine if accrual or disclosure is necessary after the lawsuits come to trial. - correct
answer ✔✔C.) Have the client assess the degree of probability of an unfavorable outcome for
the company.
The initial procedure to evaluate the potential effects of litigation, claims, and assessments is
inquiring about, and discussing with management and in-house legal counsel, certain relevant
matters. They include the policies and procedures for identifying, evaluating, and accounting for
litigation, claims, and assessments (LCA) that may result in a risk of material misstatement
(RMM). The auditor should obtain evidence relevant to the circumstances indicating (1) an
uncertainty as to possible loss, (2) the period in which the underlying cause for legal action
occurred, (3) the probability of an unfavorable outcome, and (4) the amount or range of
potential loss.
Which of the following procedures would an auditor generally perform regarding subsequent
events?
A.) Review the client's cutoff bank statements for several months after the year end.
B.) Compare the latest available interim financial statements with the statements being audited.
C.) Test internal control activities that were previously reported to management as inadequate.
,D.) Inspect inventory items that were ordered before the year end but arrived after the year
end. - correct answer ✔✔B.) Compare the latest available interim financial statements with the
statements being audited.
Subsequent events occur between the date of the financial statements and the date of the
auditor's report. The auditor should perform audit procedures designed to obtain sufficient
appropriate audit evidence that all subsequent events that require adjustment of, or disclosure
in, the financial statements have been identified. Procedures should be performed as near as
practicable to the report date. They include reading the latest subsequent interim financial
statements, if any.
Which of the following is not an audit procedure that the auditor performs with respect to
litigation, claims, and assessments?
A.) Confirm directly with the client's legal counsel that all claims have been recorded in the
financial statements.
B.) Inquire of and discuss with management the policies and procedures adopted for litigation,
claims, and assessments.
C.) Obtain from management a description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date.
D.) Obtain assurance from management that it has disclosed all unasserted claims that legal
counsel has advised are probable of assertion and must be disclosed. - correct answer ✔✔A.)
Confirm directly with the client's legal counsel that all claims have been recorded in the financial
statements.
Legal counsel's expertise does not extend to accounting matters. Legal counsel evaluates
whether claims may be asserted and the likelihood and magnitude of the outcomes. These
evaluations bear upon accounting and reporting decisions, for example, whether disclosure only
or recognition of a contingent liability is required. But all claims do not necessarily require
recognition, and legal counsel does not have information about the content of financial
statements that have not been issued.
, An auditor believes there is substantial doubt about an entity's ability to continue as a going
concern for a reasonable period of time. In evaluating the entity's plans for dealing with the
adverse effects of future conditions and events, the auditor most likely would consider, as a
mitigating factor, the entity's plans to
A.) Postpone expenditures to upgrade its information technology system.
B.) Pay cash dividends that are in arrears to the preferred stockholders.
C.) Increase the useful lives of plant assets for depreciation purposes.
D.) Purchase production facilities currently being leased from a third party. - correct answer
✔✔A.) Postpone expenditures to upgrade its information technology system.
Once an auditor has identified conditions and events indicating that substantial doubt exists
about an entity's ability to continue as a going concern, the auditor should consider
management's plans to mitigate their adverse effects. The auditor should consider plans to (1)
dispose of assets, (2) borrow money or restructure debt, (3) reduce or delay expenditures, and
(4) increase equity.
Which of the following statements about management's written representations regarding
uncorrected misstatements is correct in the audit of a nonissuer?
A.) A summary of the uncorrected misstatements should be included in, or attached to, the
written representation letter.
B.) Management should state that all misstatements identified during the audit have been
corrected.
C.) Obtaining management's written representation relieves the auditor of the need to form a
conclusion on the effects of uncorrected immaterial misstatements.
D.) Management is precluded from commenting on identified misstatements within its written
representation. - correct answer ✔✔A.) A summary of the uncorrected misstatements should
be included in, or attached to, the written representation letter.
verified answers
During an audit, an auditor discovers lawsuits filed against a client. Which of the following
would be the next action taken by the auditor?
A.) Disclose the contingent liability in a footnote to the financial statements.
B.) Accrue the liability.
C.) Have the client assess the degree of probability of an unfavorable outcome for the company.
D.) Determine if accrual or disclosure is necessary after the lawsuits come to trial. - correct
answer ✔✔C.) Have the client assess the degree of probability of an unfavorable outcome for
the company.
The initial procedure to evaluate the potential effects of litigation, claims, and assessments is
inquiring about, and discussing with management and in-house legal counsel, certain relevant
matters. They include the policies and procedures for identifying, evaluating, and accounting for
litigation, claims, and assessments (LCA) that may result in a risk of material misstatement
(RMM). The auditor should obtain evidence relevant to the circumstances indicating (1) an
uncertainty as to possible loss, (2) the period in which the underlying cause for legal action
occurred, (3) the probability of an unfavorable outcome, and (4) the amount or range of
potential loss.
Which of the following procedures would an auditor generally perform regarding subsequent
events?
A.) Review the client's cutoff bank statements for several months after the year end.
B.) Compare the latest available interim financial statements with the statements being audited.
C.) Test internal control activities that were previously reported to management as inadequate.
,D.) Inspect inventory items that were ordered before the year end but arrived after the year
end. - correct answer ✔✔B.) Compare the latest available interim financial statements with the
statements being audited.
Subsequent events occur between the date of the financial statements and the date of the
auditor's report. The auditor should perform audit procedures designed to obtain sufficient
appropriate audit evidence that all subsequent events that require adjustment of, or disclosure
in, the financial statements have been identified. Procedures should be performed as near as
practicable to the report date. They include reading the latest subsequent interim financial
statements, if any.
Which of the following is not an audit procedure that the auditor performs with respect to
litigation, claims, and assessments?
A.) Confirm directly with the client's legal counsel that all claims have been recorded in the
financial statements.
B.) Inquire of and discuss with management the policies and procedures adopted for litigation,
claims, and assessments.
C.) Obtain from management a description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date.
D.) Obtain assurance from management that it has disclosed all unasserted claims that legal
counsel has advised are probable of assertion and must be disclosed. - correct answer ✔✔A.)
Confirm directly with the client's legal counsel that all claims have been recorded in the financial
statements.
Legal counsel's expertise does not extend to accounting matters. Legal counsel evaluates
whether claims may be asserted and the likelihood and magnitude of the outcomes. These
evaluations bear upon accounting and reporting decisions, for example, whether disclosure only
or recognition of a contingent liability is required. But all claims do not necessarily require
recognition, and legal counsel does not have information about the content of financial
statements that have not been issued.
, An auditor believes there is substantial doubt about an entity's ability to continue as a going
concern for a reasonable period of time. In evaluating the entity's plans for dealing with the
adverse effects of future conditions and events, the auditor most likely would consider, as a
mitigating factor, the entity's plans to
A.) Postpone expenditures to upgrade its information technology system.
B.) Pay cash dividends that are in arrears to the preferred stockholders.
C.) Increase the useful lives of plant assets for depreciation purposes.
D.) Purchase production facilities currently being leased from a third party. - correct answer
✔✔A.) Postpone expenditures to upgrade its information technology system.
Once an auditor has identified conditions and events indicating that substantial doubt exists
about an entity's ability to continue as a going concern, the auditor should consider
management's plans to mitigate their adverse effects. The auditor should consider plans to (1)
dispose of assets, (2) borrow money or restructure debt, (3) reduce or delay expenditures, and
(4) increase equity.
Which of the following statements about management's written representations regarding
uncorrected misstatements is correct in the audit of a nonissuer?
A.) A summary of the uncorrected misstatements should be included in, or attached to, the
written representation letter.
B.) Management should state that all misstatements identified during the audit have been
corrected.
C.) Obtaining management's written representation relieves the auditor of the need to form a
conclusion on the effects of uncorrected immaterial misstatements.
D.) Management is precluded from commenting on identified misstatements within its written
representation. - correct answer ✔✔A.) A summary of the uncorrected misstatements should
be included in, or attached to, the written representation letter.
