1) Given that a firm is being sued for $12 million over a major product liability claim. Describe the conditions under which GAAP would require the firm to:

Hint: You are not to decide which of the following treatments apply to this case. You are to discuss the additional conditions that would have to exist for this same fact set to fit each of the following categories.

a) accrue a current liability for $12 million

b) disclose information about the lawsuit in the firm's footnotes

2) What types of events typically create contingent liabilities and where might an auditor look to find evidence that these events occurred? Provide three examples. Please answer this question in your own words and don't just quote the text.

Hint: Sometimes students confuse contingent liabilities with subsequent events because both involve the future in some way. A contingent liability is a situation where some future event must occur before the liability becomes a true liability. The scenario in question 1 is a contingent liability if it fits the criteria used to answer b) and is a true liability (i.e. accrued in the financial statements) if it meets the criteria for a).

3) The text describes two different types of subsequent events. The first normally is called a type 1 subsequent event (those that have a direct effect on the financial statements) and the second is called type 2 (those that don't). What is the difference between a type 1 and type 2 subsequent event and how are they reported differently in the financial statements? Also, give an example of each. Please answer this question in your own words and don't just quote the text.

Hint: A common error here is not understanding that both types of subsequent events happen after the balance sheet date, which is why they are called subsequent events.

4) Where are some places auditors might look to find subsequent events of either type? Provide at least three examples.

5) When and why might an auditor dual date an audit opinion?

Hint: Dual dating only occurs in very limited situations when the auditors discover information that is material to the audit after they have completed their field work and written their report. Make sure you cover the second part of the question about why auditors would want to dual date a report rather than just redate it.

6) The following multiple-choice questions were taken from the CPA exam and are used in the text. The normal caveat about not attempting to look up the solution applies. For each question, selected the best answer and then explain why it is better than all the alternatives. Your explanations should address all the possible alternatives presented in the question.

Hint: The biggest problem students have with my CPA exam questions is that their explanations are incomplete and don't clearly cover all the alternative in the question.

a) Which of the following controls will most likely justify a reduced assessed level of control risk for the occurrence assertion for purchases of inventory?

i) Receiving reports for inventory additions are accounted for and entry of received goods into the purchases system is verified by accounting clerks.

ii) The purchases system automatically updates the perpetual inventory master file when transactions are entered into the purchases journal.

iii) The perpetual inventory system will not allow an addition of inventory to be posted without entry of a valid receiving report number.

iv) At the close of each day, the system reconciles the perpetual inventory master file to the inventory general ledger account and generates an exception report when differences exist.

Hint: Be careful to attend to the correct assertion. Note that the CPA emphasizes management assertions and not audit objective, but audit objectives are derived from management assertions and you can use audit objectives if you find that easier.

Answer:

Explanation:

b) When an auditor tests a client's cost accounting records, the auditor's tests are primarily designed to determine that

i) costs have been correctly assigned to finished goods, work-in-process, and cost of goods sold.

ii) quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand.

iii) physical inventories are in substantial agreement with book inventories.

iv) the internal controls are in accordance with accounting standards and are functioning as planned.

Hint: Focus on how cost accounting records affect balances on the balance sheet or costs on the income statement.

Answer:

Explanation:

c) Management of Thurman Corporation included additional supplementary information in documents that include the audited financial statements for the year ended December 31, 2013. Management has asked its audit firm, Wally, CPAs, whether they can report on the supplementary information. Which of the following conditions would preclude Wally, CPAs, from conducting this engagement?

i) The supplementary information is derived from the accounting records used to generate the basic financial statements.

ii) The supplementary information covers the period January 1, 2013, through February 15, 2014.

iii) Wally's opinion of the basic financial statements was unqualified.

iv) When evaluating supplementary information, Wally plans to use the same materiality threshold as that used in the audit of the basic financial statements.

Answer:

Explanation:

d) Which of the following would be least likely to be included in a standard inquiry to the client's attorney?

i) A list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement.

ii) A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome.

iii) A request that the attorney provide information about the status of pending litigation.

iv) A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client.

Answer:

Explanation:

7) Use the Inventory table in Inventory Review folder of the Sample Project.ACL project to run follow test. Format your results as a new table and turn in a printout of your table with your assignment.

Test the inventory table for two issues - items whose costs may need to be adjusted for the lower of cost or market rule and items in inventory with negative balances. Combine the results of both tests into on output table. Describe the results of the tests as well as the audit significance, to include what audit objective(s) are involved.

Hint: The easiest way to do this is to either extract only the relevant columns from the Inventory table or hide and resize the columns in your output report to show only those columns that are relevant to evaluating the test. I have not done a tutorial for this question nor provided additional hints because I want you to reason out what tests you will need to run to answer the question. You can answer it using ACL functions previously covered in this class. There is more than one way to answer this question.