Multiple Choice Questions
The following questions deal with contingent liabilities. Choose the best response.
a. The audit step most likely to reveal the existence of contingent liabilities is
(1) A review of vouchers paid during the month following the year-end.
(2) An inquiry directed to legal counsel.
(3) Accounts payable confirmations.
(4) Mortgage-note confirmation.
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 for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome.
(3) A request that the attorney provide information about the status of pending litigation.
(4) A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client.
c. 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) Take no action regarding the event.
(2) Insist that the client issue revised financial statements.
(3) Inform the audit committee that the report cannot be relied on.
(4) Inform the appropriate authorities that the report cannot be relied on.