The following questions concern contingencies, subsequent events, and communications with those charged with governance. Choose the best response. 

a. A client acquired 25 percent of its outstanding capital stock after year end but prior to the date of the auditor’s report. The auditor should

(1) Disclose the acquisition in the opinion paragraph of the auditor’s report. 

(2) Advise management to adjust the balance sheet to reflect the acquisition. 

(3) Issue pro forma financial statements giving effect to the acquisition as if it had occurred at year end. 

(4) Advise management to disclose the acquisition in the notes to the financial statements. 

b. Which of the following statements is correct about an auditor’s required communication with those charged with governance? 

(1) Any matters communicated with those charged with governance are also required to be communicated to the entity’s management. 

(2) The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management. 

(3) Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance. 

(4) The auditor should not communicate frequently recurring misstatements unless they are material. 

c. In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of 

(1) Obtaining a client representation letter. 

(2) Reviewing derivative transactions reflected on the quarter-end balance sheet. 

(3) Reviewing the status of long-term leases. 

(4) Discussing sales contracts with the sales manager.