ACCT 612 FINAL EXAM

SECTION 1: 2 POINTS EACH. PLEASE SELECT THE BEST ANSWER TO EACH OF THE FOLLOWING QUESTIONS.

1)

Which of the following best describes the test data approach?

A)

Auditors process their own test data using the client's computer system and application program.

B)

Auditors process their own test data using their own computers that simulate the client's computer system.

C)

Auditors use auditor-controlled software to do the same operations that the client's software does, using the same data files.

D)

Auditors use client-controlled software to do the same operations that the client's software does, using auditor created data files.

2)

A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting.

A)

potential misstatement

B)

significant weakness

C)

significant deficiency

D)

fraud symptom

3)

Which deficiency exists if a necessary control is missing or not properly implemented?

A)

control

B)

significant

C)

design

D)

operating

4)

Which of the following is a correct statement?

A)

The auditor uses the control risk assessment and results of tests of controls to determine planned detection risk.

B)

The auditor links the inherent risk assessments to the balance-related audit objectives.

C)

The audit risk model is used determine the level of audit risk.

D)

All of the above are correct statements.

5)

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would

A)

Perform additional tests of controls	Decide to modify tests of details of balances
Yes	Yes

B)

Perform additional tests of controls	Decide to modify tests of details of balances
No	No

C)

Perform additional tests of controls	Decide to modify tests of details of balances
Yes	No

D)

Perform additional tests of controls	Decide to modify tests of details of balances
No	Yes

6)

Which of the following tests commonly occur together?

A)

substantive tests of transactions and tests of controls

B)

substantive tests of transactions and obtaining an understanding of internal controls

C)

analytical procedures and tests of controls

D)

tests of controls and tests of details of balances

7)

Risk assessment procedures are performed by auditors during an audit in order to

A)

determine the risk of material misstatement in the financial statements.

B)

determine the amount of testing of internal control.

C)

determine the extent of testing of details of balances.

D)

determine the extent of testing of transactions.

8)

For clients with highly sophisticated computerized accounting systems, auditors perform tests throughout the year to identify significant or unusual transactions. This approach is called ________ and is frequently used in integrated audits of financial statements and internal control for public companies.

A)

continuous audit program

B)

continuous auditing

C)

continuous analytical testing

D)

continuous audit mix

9)

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with

A)

the original invoices.

B)

an approved master price list.

C)

the amounts recorded in the sales journal for that transaction.

D)

the amounts posted to the customer's account in the accounts receivable master file.

10)

In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.

A)

accuracy

B)

existence

C)

completeness

D)

none of the above

11)

The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on

A)

bad debt expense.

B)

the analytical tests to be performed.

C)

the confirmation of accounts receivable.

D)

the impact of processing cash receipts.

12)

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the

A)

existence objective.

B)

completeness objective.

C)

ownership objective.

D)

valuation objective.

13)

The upper limit of the probable population exception rate is the

A)

upper exception rate.

B)

estimated population exception rate.

C)

computed upper exception rate.

D)

the tolerable exception rate.

14)

Which of the following methods of sample selection is appropriately used when selecting a random sample?

A)

Auditor's judgmental selection of items	Use of random number generators	Generalized audit software
Yes	No	Yes

B)

Auditor's judgmental selection of items	Use of random number generators	Generalized audit software
No	Yes	Yes

C)

Auditor's judgmental selection of items	Use of random number generators	Generalized audit software
Yes	No	No

D)

Auditor's judgmental selection of items	Use of random number generators	Generalized audit software
No	Yes	No

15)

Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated?

A)

sample exception rate

B)

estimated population exception rate

C)

computed upper exception rate

D)

exception

16)

Which of the following is an accurate statement regarding sampling distribution?

A)

A sampling distribution is a sample with characteristics the same as those of the population.

B)

Sampling distributions allow the auditor to make probability statements about the likely representativeness of any sample that is in the distribution.

C)

Each population exception rate and sample size has the same sampling distribution.

D)

Auditors cannot use sampling distributions to draw statistical conclusions about the unknown population being sampled.

17)

When making the sampling decisions for accounts receivable confirmations,

A)

it is important to sample some items for every material segment of the population.

B)

if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement.

C)

inherent risk does not impact the sample size.

D)

stratification of the sample is discouraged under current auditing standards.

18)

The positive (as opposed to the negative) form of receivables confirmation may be preferred when

A)

internal control surrounding accounts receivable is considered to be effective.

B)

there is reason to believe that a substantial number of accounts may be in dispute.

C)

a large number of small balances are involved.

D)

the auditor believes that the recipients of the confirmations will give the requests adequate consideration.

19)

Which audit procedure would be used to test for the existence balance-related audit objective?

A)

Trace ten accounts from the aged trial balance to the accounts receivable master file.

B)

Confirm accounts receivable.

C)

Review large sales returns and allowances before and after the balance sheet date.

D)

Trace ten accounts from the trial balance to the accounts on the master file.

20)

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

A)

existence

B)

completeness

C)

rights

D)

detail tie-in

21)

Which balance-related audit objective cannot be assessed using monetary unit sampling?

A)

accuracy

B)

completeness

C)

existence

D)

All of the above can be assessed using monetary unit sampling.

22)

If the population is not considered acceptable, one step the auditor is likely to take is to

A)

retest all internal controls.

B)

ask the client to adjust the account balance.

C)

test the entire population.

D)

decrease inherent risk.

23)

When defining the population and the sampling unit for tests of details of balances,

A)

the population is defined as all of the transactions in the journal for the period.

B)

the sampling unit must be the same for all balance sheet accounts.

C)

if sampling for completeness, the sampling unit will be customers with zero balances.

D)

if sampling for completeness, the sampling unit will be the items making up the recorded population.

24)

Tolerable misstatement is used to

A)

Determine sample size	Select the sample	Evaluate results
Yes	Yes	No

B)

Determine sample size	Select the sample	Evaluate results
No	Yes	No

C)

Determine sample size	Select the sample	Evaluate results
No	No	Yes

D)

Determine sample size	Select the sample	Evaluate results
Yes	No	Yes

25)

When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to

A)

the physical inventory.

B)

accounts payable.

C)

accounts payable and cost of goods sold.

D)

the physical inventory and accounts payable.

26)

Cutoff information for inventory acquisitions should be obtained during

A)

the interim period prior to year-end.

B)

the interim period immediately following year-end.

C)

the physical observation of inventory.

D)

either the interim period prior to or immediately following year-end.

27)

The extent of a search for unrecorded liabilities largely depends on

A)

materiality and inherent risk.

B)

materiality and control risk.

C)

materiality only.

D)

inherent risk only.

28)

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were

A)

received prior to the balance sheet date.

B)

shipped on or before the balance sheet date.

C)

both shipped and received prior to the balance sheet date.

D)

paid for in advance.

29)

Which of the following is a substantive analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off?

A)

Compare depreciation expense divided by gross equipment cost with previous years.

B)

Compare gross manufacturing cost divided by some measure of production with previous years.

C)

Compare accumulated depreciation divided by gross equipment cost with previous years.

D)

Compare annual repairs and maintenance accounts with previous years.

30)

When auditing accrued property taxes,

A)

the source for the debits to the liability account is the acquisitions journal.

B)

realizable value is an important balance-related audit objective.

C)

the ending balance in the account should be confirmed with the applicable taxing authority.

D)

the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceding year is used in the current year.

31)

Failure to capitalize a fixed asset at the correct amount would impact which financial statements?

A)

the balance sheet only

B)

the income statement only

C)

the cash flow statement only

D)

both the income statement and the balance sheet

32)

In connection with a review of the prepaid insurance account, which of the following audit procedures would you be least likely to use?

A)

Recompute the portion of the premium that expired during the year.

B)

Prepare excerpts of insurance policies for audit working papers.

C)

Confirm premium rates with an independent insurance broker.

D)

Examine support for premium payments.

33)

The inventory and warehousing cycle can be thought of as having two separate but closely related systems, one involving the actual physical flow of goods, and the other the

A)

related costs.

B)

storage of the goods.

C)

internal control over those goods.

D)

prevention of waste, obsolescence, and theft.

34)

An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory. The purpose of the procedure is to

A)

obtain proper cutoff information.

B)

uncover the inclusion of nonexistent items as inventory.

C)

determine if the client has adequately priced the inventory item.

D)

verify that the client has not changed the recorded counts after the auditor left the premises.

35)

Auditor tests of physical controls over raw materials, work-in-process, and finished goods are performed by

A)

Examination	Observation	Inquiry
Yes	No	Yes

B)

Examination	Observation	Inquiry
No	Yes	No

C)

Examination	Observation	Inquiry
Yes	Yes	No

D)

Examination	Observation	Inquiry
No	Yes	Yes

36)

A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is

A)

inventory as recorded on tags actually exists (existence).

B)

existing inventory is counted and tagged (completeness).

C)

inventory is counted accurately (accuracy).

D)

inventory is classified correctly (classification).

37)

Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least

A)

one quarter beyond the balance sheet date.

B)

one quarter beyond the date of the auditor's report.

C)

one year beyond the balance sheet date.

D)

one year beyond the date of the auditor's report.

38)

Which of the following statements is correct?

A)

A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence.

B)

A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management.

C)

A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source.

D)

A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.

39)

Which of the following is correct regarding supplementary information?

A)

The auditor must express an opinion on the supplementary information.

B)

When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements.

C)

If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information.

D)

The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.

40)

Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions?

A)

There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.

B)

The outcome must be resolved by a third-party.

C)

There is uncertainty about the amount of the future payment or impairment.

D)

The outcome will be resolved by some future event or events.

SECTION 2: 10 POINTS. PLEASE RECORD YOUR ANSWER ON THE ANSWER SHEET.

The fieldwork for the December 31, 2016 audit of Treble Corporation ended on March 17, 2017. The financial statements and auditor's report were issued and mailed to stockholders on March 29, 2017. In each of the material situations (1 through 5) below, indicate the appropriate action (a, b, c, d, or e). The possible actions are as follows:

a. Adjust the December 31, 2016 financial statements.

b. Disclose the information in a footnote in the December 31, 2016 financial statements.

c. Request the client revise and reissue the December 31, 2016 financial statements. The revision should involve an adjustment to the December 31, 2016 financial statements.

d. Request the client revise and reissue the December 31, 2016 financial statements. The revision should involve the addition of a footnote, but no adjustment, to the December 31, 2016 financial statements.

e. No action is required.

The situations are as follows:

________ 1. On January 16, 2017 a lawsuit was filed against Treble for a patent infringement action that allegedly took place in early 2014. In the opinion of Treble's attorneys, there is a reasonable (but not probable) danger of a significant loss to Treble.

________ 2. On February 19, 2017, Treble settled a lawsuit out of court that had originated in 2015 and is currently listed as a contingent liability.

________ 3. On March 30, 2017, Treble settled a lawsuit out of court that had originated in 2014 and is currently listed as a contingent liability.

________ 4. On February 2, 2017, you discovered an uninsured lawsuit against Treble that had originated on August 30, 2013. There is a reasonable (but not probable) danger of a significant loss to Treble.

________ 5. On April 7, 2017, you discovered that a debtor of Treble went bankrupt on January 22, 2017, due to a major uninsured fire that occurred on January 2, 2017.

SECTION 3: PLEASE RECORD YOUR ANSWER ON THE ANSWER SHEET.

When designing tests of controls and substantive tests an auditor is gathering evidence to satisfy the transaction-related audit objectives. What are the four steps the auditor would normally follow to reduce assessed control risk?

ACCT 612 FINAL EXAM SECTION 1: 2 POINTS EACH. PLEASE SELECT THE BEST ANSWER TO EACH OF THE FOLLOWING QUESTIONS. 1) Which of the following best describes the test data approach? A) Auditors process their o wn test data using the client's computer system and application program. B) Auditors process their own test data using their own computers that simulate the client's computer system. C) Auditors use auditor-controlled software to do the same operations that the client's software does, using the same data files. D) Auditors use client-controlled software to do the same operations that the client's software does, using auditor created data files. 2) A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting. A) potential misstatement B) significant weakness C) significant deficiency D) fraud symptom 3) Which deficiency exists if a necessary control is missing or not properly implemented? A) control B) significant C) design D) operating 4) Which of the following is a correct statement? A) The auditor uses the control risk assessment and results of tests of controls to determine planned detection risk. B) The auditor links the inherent risk assessments to the balance-related audit objectives. C) The audit risk model is used determine the level of audit risk. D) All of the above are correct statements. 5) When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would A) Perform additional tests of controls Yes B) Decide to modify tests of details of balances Yes Perform additional tests of controls No C) Decide to modify tests of details of balances No Perform additional tests of controls Yes D) Decide to modify tests of details of balances No Perform additional tests of controls No Decide to modify tests of details of balances Yes 6) Which of the following tests commonly occur together? A) substantive tests of transactions and tests of controls B) substantive tests of transactions and obtaining an understanding of internal controls C) analytical procedures and tests of controls D) tests of controls and tests of details of balances 7) Risk assessment procedures are performed by auditors during an audit in order to A) determine the risk of material misstatement in the financial statements. B) determine the amount of testing of internal control. C) determine the extent of testing of details of balances. D) determine the extent of testing of transactions. 8) For clients with highly sophisticated computerized accounting systems, auditors perform tests throughout the year to identify significant or unusual transactions. This approach is called ________ and is frequently used in integrated audits of financial statements and internal control for public companies. A) continuous audit program B) continuous auditing C) continuous analytical testing D) continuous audit mix 9) To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file. 10) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A) accuracy B) existence C) completeness D) none of the above 11) The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on A) bad debt expense. B) the analytical tests to be performed. C) the confirmation of accounts receivable. D) the impact of processing cash receipts. 12) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the A) existence objective. B) completeness objective. C) ownership objective. D) valuation objective. 13) The upper limit of the probable population exception rate is the A) upper exception rate. B) estimated population exception rate. C) computed upper exception rate. D) the tolerable exception rate. 14) Which of the following methods of sample selection is appropriately used when selecting a random sample? A) Auditor's judgmental selection of items Yes B) Use of random number generators No Generalized audit software Yes Auditor's judgmental selection of items No C) Use of random number generators Yes Generalized audit software Yes Auditor's judgmental selection of items Yes D) Use of random number generators No Generalized audit software No Auditor's judgmental selection of items No Use of random number generators Yes Generalized audit software No 15) Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated? A) sample exception rate B) estimated population exception rate C) computed upper exception rate D) exception 16) Which of the following is an accurate statement regarding sampling distribution? A) A sampling distribution is a sample with characteristics the same as those of the population. B) Sampling distributions allow the auditor to make probability statements about the likely representativeness of any sample that is in the distribution. C) Each population exception rate and sample size has the same sampling distribution. D) Auditors cannot use sampling distributions to draw statistical conclusions about the unknown population being sampled. 17) When making the sampling decisions for accounts receivable confirmations, A) it is important to sample some items for every material segment of the population. B) if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement. C) inherent risk does not impact the sample size. D) stratification of the sample is discouraged under current auditing standards. 18) The positive (as opposed to the negative) form of receivables confirmation may be preferred when A) internal control surrounding accounts receivable is considered to be effective. B) there is reason to believe that a substantial number of accounts may be in dispute. C) a large number of small balances are involved. D) the auditor believes that the recipients of the confirmations will give the requests adequate consideration. 19) Which audit procedure would be used to test for the existence balance-related audit objective? A) Trace ten accounts from the aged trial balance to the accounts receivable master file. B) Confirm accounts receivable. C) Review large sales returns and allowances before and after the balance sheet date. D) Trace ten accounts from the trial balance to the accounts on the master file. 20) For sales, the occurrence transaction-related audit objective affects which of the following balancerelated audit objectives? A) existence B) completeness C) rights D) detail tie-in 21) Which balance-related audit objective cannot be assessed using monetary unit sampling? A) accuracy B) completeness C) existence D) All of the above can be assessed using monetary unit sampling. 22) If the population is not considered acceptable, one step the auditor is likely to take is to A) retest all internal controls. B) ask the client to adjust the account balance. C) test the entire population. D) decrease inherent risk. 23) When defining the population and the sampling unit for tests of details of balances, A) the population is defined as all of the transactions in the journal for the period. B) the sampling unit must be the same for all balance sheet accounts. C) if sampling for completeness, the sampling unit will be customers with zero balances. D) if sampling for completeness, the sampling unit will be the items making up the recorded population. 24) Tolerable misstatement is used to A) Determine sample size Yes B) Select the sample Yes Evaluate results No Determine sample size No C) Select the sample Yes Evaluate results No Determine sample size No D) Select the sample No Evaluate results Yes Determine sample size Yes Select the sample No Evaluate results Yes 25) When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to A) the physical inventory. B) accounts payable. C) accounts payable and cost of goods sold. D) the physical inventory and accounts payable. 26) Cutoff information for inventory acquisitions should be obtained during A) the interim period prior to year-end. B) the interim period immediately following year-end. C) the physical observation of inventory. D) either the interim period prior to or immediately following year-end. 27) The extent of a search for unrecorded liabilities largely depends on A) materiality and inherent risk. B) materiality and control risk. C) materiality only. D) inherent risk only. 28) When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were A) received prior to the balance sheet date. B) shipped on or before the balance sheet date. C) both shipped and received prior to the balance sheet date. D) paid for in advance. 29) Which of the following is a substantive analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off? A) Compare depreciation expense divided by gross equipment cost with previous years. B) Compare gross manufacturing cost divided by some measure of production with previous years. C) Compare accumulated depreciation divided by gross equipment cost with previous years. D) Compare annual repairs and maintenance accounts with previous years. 30) When auditing accrued property taxes, A) the source for the debits to the liability account is the acquisitions journal. B) realizable value is an important balance-related audit objective. C) the ending balance in the account should be confirmed with the applicable taxing authority. D) the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceding year is used in the current year. 31) Failure to capitalize a fixed asset at the correct amount would impact which financial statements? A) the balance sheet only B) the income statement only C) the cash flow statement only D) both the income statement and the balance sheet 32) In connection with a review of the prepaid insurance account, which of the following audit procedures would you be least likely to use? A) Recompute the portion of the premium that expired during the year. B) Prepare excerpts of insurance policies for audit working papers. C) Confirm premium rates with an independent insurance broker. D) Examine support for premium payments. 33) The inventory and warehousing cycle can be thought of as having two separate but closely related systems, one involving the actual physical flow of goods, and the other the A) related costs. B) storage of the goods. C) internal control over those goods. D) prevention of waste, obsolescence, and theft. 34) An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory. The purpose of the procedure is to A) obtain proper cutoff information. B) uncover the inclusion of nonexistent items as inventory. C) determine if the client has adequately priced the inventory item. D) verify that the client has not changed the recorded counts after the auditor left the premises. 35) Auditor tests of physical controls over raw materials, work-in-process, and finished goods are performed by A) Examination Yes B) Observation No Inquiry Yes Examination No C) Observation Yes Inquiry No Examination Yes D) Observation Yes Inquiry No Examination No Observation Yes Inquiry Yes 36) A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is A) inventory as recorded on tags actually exists (existence). B) existing inventory is counted and tagged (completeness). C) inventory is counted accurately (accuracy). D) inventory is classified correctly (classification). 37) Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least A) one quarter beyond the balance sheet date. B) one quarter beyond the date of the auditor's report. C) one year beyond the balance sheet date. D) one year beyond the date of the auditor's report. 38) Which of the following statements is correct? A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. C) A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source. D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable. 39) Which of the following is correct regarding supplementary information? A) The auditor must express an opinion on the supplementary information. B) When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements. C) If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information. D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements. 40) Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions? A) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition. B) The outcome must be resolved by a third-party. C) There is uncertainty about the amount of the future payment or impairment. D) The outcome will be resolved by some future event or events. SECTION 2: 10 POINTS. PLEASE RECORD YOUR ANSWER ON THE ANSWER SHEET. The fieldwork for the December 31, 2016 audit of Treble Corporation ended on March 17, 2017. The financial statements and auditor's report were issued and mailed to stockholders on March 29, 2017. In each of the material situations (1 through 5) below, indicate the appropriate action (a, b, c, d, or e). The possible actions are as follows: a. Adjust the December 31, 2016 financial statements. b. Disclose the information in a footnote in the December 31, 2016 financial statements. c. Request the client revise and reissue the December 31, 2016 financial statements. The revision should involve an adjustment to the December 31, 2016 financial statements. d. Request the client revise and reissue the December 31, 2016 financial statements. The revision should involve the addition of a footnote, but no adjustment, to the December 31, 2016 financial statements. e. No action is required. The situations are as follows: ________ 1. On January 16, 2017 a lawsuit was filed against Treble for a patent infringement action that allegedly took place in early 2014. In the opinion of Treble's attorneys, there is a reasonable (but not probable) danger of a significant loss to Treble. ________ 2. On February 19, 2017, Treble settled a lawsuit out of court that had originated in 2015 and is currently listed as a contingent liability. ________ 3. On March 30, 2017, Treble settled a lawsuit out of court that had originated in 2014 and is currently listed as a contingent liability. ________ 4. On February 2, 2017, you discovered an uninsured lawsuit against Treble that had originated on August 30, 2013. There is a reasonable (but not probable) danger of a significant loss to Treble. ________ 5. On April 7, 2017, you discovered that a debtor of Treble went bankrupt on January 22, 2017, due to a major uninsured fire that occurred on January 2, 2017. SECTION 3: PLEASE RECORD YOUR ANSWER ON THE ANSWER SHEET. When designing tests of controls and substantive tests an auditor is gathering evidence to satisfy the transaction-related audit objectives. What are the four steps the auditor would normally follow to reduce assessed control risk