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1) Auditors often integrate procedures for presentation and disclosure objectives with:

A)

Tests for planning objectives Tests for balance-related objectives

Yes Yes

B)

Tests for planning objectives Tests for balance-related objectives

No No

C)

Tests for planning objectives Tests for balance-related objectives

Yes No

D)

Tests for planning objectives Tests for balance-related objectives


No Yes

Answer: D

Terms: Procedures for presentation and disclosure objectives

Diff: Easy

Objective: LO 24-1

AACSB: Reflective thinking skills

2) The auditor's primary concern relative to presentation and disclosure-related objectives is:

A) accuracy.

B) existence.

C) completeness.

D) occurrence.

Answer: C

Terms: Presentation and disclosure-related objectives

Diff: Easy

Objective: LO 24-1

AACSB: Reflective thinking skills

Learning Objective 24-2


1) If a potential loss on a contingent liability is remote, the liability usually is:

A) disclosed in footnotes, but not accrued.

B) neither accrued nor disclosed in footnotes.

C) accrued and indicated in the body of the financial statements.

D) disclosed in the auditor's report but not disclosed on the financial statements.

Answer: B

Terms: Contingent liability; remote

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills

2) A commitment is best described as:

A) an agreement to commit the firm to a set of fixed conditions in the future.

B) an agreement to commit the firm to a set of fixed conditions in the future that depends on
company profitability.

C) an agreement to commit the firm to a set of fixed conditions in the future that depends on
current market conditions.

D) a potential future obligation to an outside party for an as yet to be determined amount.

Answer: A

Terms: Commitments

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills

3) Which of the following groups has the responsibility for identifying and deciding the
appropriate accounting treatment for recording or disclosing contingent liabilities?
A) Auditors

B) Legal counsel

C) Management

D) Management and the auditors

Answer: C

Terms: Recording or disclosing contingent liabilities

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills

4) You are auditing Rodgers and Company. You are aware of a potential loss due to
non-compliance with environmental regulations. Management has assessed that there is a 40%
chance that a $10M payment could result from the non-compliance. The appropriate financial
statement treatment is to:

A) accrue a $4 million liability.

B) disclose a liability and provide a range of outcomes.

C) since there is less than a 50% chance of occurrence, ignore.

D) since there is greater that a remote chance of occurrence, accrue the $10 million.

Answer: B

Terms: Potential loss for noncompliance

Diff: Moderate

Objective: LO 24-2

AACSB: Analytic skills


5) Which of the following is a contingent liability with which an auditor is particularly
concerned?

A)

Notes receivable discounted Product warranties

Yes Yes

B)

Notes receivable discounted Product warranties

No No

C)

Notes receivable discounted Product warranties

Yes No

D)

Notes receivable discounted Product warranties


No Yes

Answer: A

Terms: Contingent liability; auditor particularly concerned

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills

6) Audit procedures related to contingent liabilities are initially focused on:

A) accuracy.

B) completeness.

C) existence.

D) occurrence.

Answer: D

Terms: Audit procedures related to contingent liabilities

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills

7) With which of the following client personnel would it generally not be appropriate to inquire
about commitments or contingent liabilities?
A) Controller

B) President

C) Accounts receivable clerk

D) Vice president of sales

Answer: C

Terms: Inquire for commitments or contingent liabilities

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills

8) Inquiries of management regarding the possibility of unrecorded contingencies will be useful


in uncovering:

A)

When management does not


Management's intentional failure to comprehend accounting disclosure
disclose existing contingencies. requirements.

Yes Yes

B)

When management does not


Management's intentional failure to comprehend accounting disclosure
disclose existing contingencies. requirements.
No No

C)

When management does not


Management's intentional failure to comprehend accounting disclosure
disclose existing contingencies. requirements.

Yes No

D)

When management does not


Management's intentional failure to comprehend accounting disclosure
disclose existing contingencies. requirements.

No Yes

Answer: D

Terms: Inquiries of management; Unrecorded contingencies

Diff: Easy

Objective: LO 24-2

AACSB: Reflective thinking skills


9) Which of the following is not considered a commitment?

A) Agreements to purchase raw materials

B) Pension plans

C) Agreements to lease facilities at set prices

D) Each of the above is a commitment.

Answer: D

Terms: Commitments

Diff: Moderate

Objective: LO 24-2

AACSB: Reflective thinking skills

10) If an auditor concludes there are contingent liabilities, then he or she must evaluate the:

A)

Nature of the disclosure to be included in

Materiality of the potential liability. the financial statements.

Yes Yes

B)

Materiality of the potential liability. Nature of the disclosure to be included in


the financial statements.

No No

C)

Nature of the disclosure to be included in

Materiality of the potential liability. the financial statements.

Yes No

D)

Nature of the disclosure to be included in

Materiality of the potential liability. the financial statements.

No Yes

Answer: A

Terms: Contingent liabilities

Diff: Moderate

Objective: LO 24-2
AACSB: Reflective thinking skills

11) One of the primary approaches in dealing with uncertainties in loss contingencies uses a
________ threshold.

A) monetary

B) materiality

C) probability

D) analytical

Answer: C

Terms: Contingent liabilities

Diff: Moderate

Objective: LO 24-2

AACSB: Reflective thinking skills

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