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CHAPTER 17

COMPLETING THE AUDIT ENGAGEMENT

Answers to Multiple-Choice Questions

17-13 c 17-18 a
17-14 d 17-19 a
17-15 a 17-20 a
17-16 b 17-21 c
17-17 a

17-7 The auditor obtains a representation letter in order to corroborate oral


representations made to the auditor and to document the continued
appropriateness of such representations. The representation letter also reduces the
possibility of misunderstanding concerning the responses provided by
management to the auditor's inquiries.

17-22 Since the events or conditions that should be considered in the financial
accounting for and reporting of litigation, claims, and assessments are matters
within the direct knowledge, and often, control of management of an entity,
management is the primary source of information about such matters.
Accordingly, Harper's audit procedures with respect to the existence of loss
contingencies arising from litigation, claims, and assessments should include the
following:
• Inquire and discuss with management the policies and procedures adopted for
identifying, evaluating, and accounting for litigation, claims, and assessments.
• Obtain from management a description and evaluation of litigation, claims,
and assessments that existed at the date of the balance sheet being reported on,
and during
the period from the balance sheet date to the date the information is furnished,
including an identification of those matters referred to legal counsel, and
obtain assurances from management, ordinarily in the form of a representation
letter, that they have disclosed all such matters required to be disclosed by
generally accepted accounting principles (Statement of Financial Accounting
Standards No. 5).
• Examine documents in the client's possession concerning litigation, claims,
and assessments, including correspondence and invoices from lawyers.
• Obtain assurance from management, ordinarily in the form of a representation
letter, that they have disclosed all unasserted claims that the lawyer has
advised them are probable of assertion and must be disclosed in accordance
with generally accepted accounting principles (Statement of Financial
Accounting Standards No. 5).
• The auditor should request the client's management to send a letter of inquiry
to those lawyers with whom they consulted concerning litigation, claims, and
assessments.
Examples of other procedures undertaken for different purposes that might also
disclose litigation, claims, and assessments are the following:
• Read minutes of stockholders, directors, and appropriate committee meetings
held during and subsequent to the period being examined.
• Read contracts, loan agreements, leases, and correspondence from taxing or
other governmental agencies, and similar documents.
• Obtain information concerning guarantees from bank confirmation forms.
• Inspect other documents for possible guarantees by the client.

17-24 a. For the financial statement audit, the two types of subsequent events that
require Namiki’s consideration and evaluation are:
• Events that provide additional evidence concerning conditions that existed
at the balance sheet date and affect the estimates inherent in the process of
preparing financial statements. This type of subsequent event requires that
the financial statements be adjusted for any changes in estimates resulting
from the use of such additional evidence.
• Events that provide evidence concerning conditions that did not exist at the
balance sheet date but arose subsequent to that date. Such events result in
financial statement disclosure.
If Taylor is a public company, then for the audit of internal control over financial
reporting the two types of subsequent events the auditor must consider are:
• Control events that reveal information about a material weakness that
existed as of the end of the reporting period. If the event reveals
information about a material weakness, the auditor should issue an adverse
opinion on the effectiveness of internal control over financial reporting. If
the auditor is unable to determine the effect of the subsequent control event
on the effectiveness of the company’s internal control, the auditor should
disclaim any opinion.
• Control events that create or reveal information about a new condition that
did not exist as of the end of the reporting period. If the information has a
material effect on the company, the auditor should include an explanatory
paragraph describing the event and its effects or directing the reader’s
attention to the event and its effects as disclosed in management’s report.

b. The auditing procedures Namiki should consider performing to gather evidence


concerning subsequent events include the following:
• Compare the latest available interim statements with the financial
statements being audited.
• Ascertain whether the interim statements were prepared on the same basis
as the audited financial statements.
• Inquire whether any contingent liabilities or commitments existed at the
balance sheet date or the date of inquiry.
• Inquire whether there was any significant change in the capital stock, long-
term debt, or working capital to the date of inquiry.
• Inquire about the current status of items in the audited financial statements
that were accounted for on the basis of tentative, preliminary, or
inconclusive data.
• Read or inquire about the minutes of meetings of stockholders or the board
of directors.
• Inquire of the client's legal counsel concerning litigation, claims, and
assessments.
• Obtain a management representation letter, dated as of the date of Namiki's
audit report, as to whether any subsequent events would require adjustment
or disclosure.
• Make such additional inquiries or perform such additional procedures
Namiki considers necessary and appropriate.
• Examine and/or inquire about findings included in internal audit reports
completed after year end.