The following questions deal with contingent liabilities and the review for subsequent events. Choose the best response.
a. When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes
based on information available at the date of issuance, the auditor should
(1) inform the appropriate authorities that the report cannot be relied on.
(2) take no action regarding the event.
(3) insist that the client issue revised financial statements.
(4) inform the audit committee that the report cannot be relied on.
b. Which of the following would be least likely to be included in a standard inquiry to
the client’s attorney?
(1) A list provided by the client of pending litigation or asserted or unasserted claims
with which the attorney has had some involvement
(2) A request that the attorney provide information about the status of pending litigation
(3) A request for the attorney to identify any pending litigation or threatened legal
action not identified on a list provided by the client
(4) A request for the attorney to opine on the correct accounting treatment associ-
ated with an outstanding claim or pending lawsuit outcome
c. An example of an event occurring in the period between the end of the year being
audited and the date of the auditor’s report that normally will not require disclosure
in the financial statements or auditor’s report is
(1) decreased sales volume resulting from a general business recession.
(2) serious damage to the company’s plant from a widespread flood.
(3) issuance of a widely advertised capital stock issue with restrictive covenants.
(4) settlement of a large liability for considerably less than the amount recorded
