Post Audit Responsibilities

Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

• 1. A technological development that could affect the entity’s future ability to continue as a going concern.

• 1. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.

• 1. The discovery of information regarding a contingency that existed before the financial statements were issued.

• 1. The final resolution of a lawsuit disclosed in the notes to the financial statements.

Which of the following statements best describes the auditor’s responsibility concerning the appropriateness of the going concern assumption in the preparation of the financial statements?

• 1. The auditor’s responsibility is to make a specific assessment of the entity’s ability to continue as a going concern.

• 1. The auditor’s responsibility is to predict future events or conditions that may cause the entity to cease to continue as a going concern.

• 1. The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern assumption and consider whether there are material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in the financial statements.

• 1. The auditor’s responsibility is to give a guarantee in the audit report that the entity has the ability to continue as a going concern.

1. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?

• 1. Cash flows from operating activities are negative.

• 1. Stock dividends replace annual cash dividends.

• 1. Significant related party transactions are pervasive.

• 1. Research and development projects are postponed.

1. Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?

• 1. Confirming with third parties the details of arrangements to maintain financial support.

• 1. Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry. 

• 1. Reconciling the cash balance per books with the cutoff bank confirmation.

• 1. Inspecting title documents to verify whether any assets are pledged as collateral.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt an entity’s ability to continue as a going concern.

• 1. Restrictions on the disposal of principal assets are present.

• 1. Usual trade credit from suppliers is denied.

• 1. Significant related party transactions are pervasive.

• 1. Arrearages in principal stock dividends are paid.

1. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?

• 1. Confirmation of bank balances.

• 1. Confirmation of accounts receivable from major customers.

• 1. Reconciliation of interest expense with debt outstanding.

• 1. Review of compliance with terms of debt agreements.

1. arold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a going concern for a reasonable period of time. In evaluating Jersamtan’s plans for dealing with the adverse effects of future conditions and events, Harold most likely would consider, as a mitigating factor, Jersamtan’s plans  to

• Postpone expenditures for research and development projects.

• 1. Purchase production facilities currently being leased from a related party.

• 1. Strengthen internal controls over cash disbursements.

• 1. Discuss with lenders the terms of all debt and loan agreements.

1. When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to

• 1. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.

• Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

• Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.

• 1. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that specifically refers to “substantial doubt” and “going concern.”

1. Harry, CPA, believes there is substantial doubt about the ability to Tansamjer Corp. to continue as a going concern for a reasonable period of time. In evaluating Tansamjer’s plans for dealing with the adverse effects of future conditions and events, Harry most likely would consider, as a mitigating factor, Tansamjer’s plans to

• 1. Purchase equipment and production facilities currently being leased.

• 1. Accumulate treasury stock at prices favorable to Tansamjer’s historic price range.

• 1. Negotiate reductions in required dividends being paid on preferred stock.

• 1. Accelerate research and development projects related to future products.

1. After an audit report containing an unqualified opinion on a client’s financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should

• 1. Describe the effects of this subsequently discovered information in a communication with persons known to be relying on the financial statements.

• 1. Take no action because the auditor has no obligation to make any further inquiries.

• 1. Determine whether the information is reliable and, if determined to be reliable, request that revised financial statements be issued.

• 1. Notify the entity that the auditor’s report may no longer be associated with the financial statements.