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) accounts payable confirmations.

(2) an inquiry directed to law firms.

(3) mortgage-note confirmation.

(4) a review of vouchers paid during the month following the year end.

b. When a contingency is resolved immediately subsequent to the issuance of a report that included an appropriate note on the contingency, the auditor should (1) inform the appropriate authorities that the report cannot be relied upon.
(2) insist that the client issue revised financial statements.
(3) inform the audit committee that the report cannot be relied upon.
(4) take no action regarding the event.
(AICPA adapted)