Question 1

According to MFRS 137, how should a contingency be treated if the chance of the future event occurring is 'more likely than not'?

Accepted Answer

It should be recognized in the financial statements and accompanied with appropriate disclosure.

Question 2

Which of the following is NOT an example of a contingency that auditors should review?

Accepted Answer

Routine payroll expenses

Question 3

An auditor discovers a major fire that destroyed a manufacturing facility after the SOFP date. According to the study materials, how should this event be classified?

Accepted Answer

Type 2 subsequent event requiring disclosure in the financial statements

Question 4

Which audit procedure is specifically used to obtain corroborating evidence regarding litigation, claims, and assessments?

Accepted Answer

Obtaining a legal letter from the entity’s external legal counsel

Question 5

A company enters into a long-term contract to purchase raw materials at a fixed price. What is the auditor’s main responsibility regarding this commitment?

Accepted Answer

Ensure appropriate disclosures and accruals are made in the financial statements

Question 6

Which of the following best describes a Type 1 subsequent event?

Accepted Answer

An event that provides additional evidence about conditions that existed at the SOFP date and affects estimates in the financial statements

Question 7

If an auditor becomes aware of a subsequent event after the auditor’s report date but before the financial statements are issued, what is the correct course of action?

Accepted Answer

Discuss the matter with management and determine if the financial statements need to be amended or disclosed

Question 8

Which of the following is NOT a procedure for identifying contingencies during an audit?

Accepted Answer

Calculating depreciation expense for fixed assets

Question 9

A company settles a lawsuit after the SOFP date for an amount different from what was recorded in the year-end financial statements. How should the auditor treat this event?

Accepted Answer

As a Type 1 subsequent event requiring adjustment of the financial statements

Question 10

Which document is issued by the auditor to management after completing the audit, providing recommendations for improvements in internal controls and processes?

Accepted Answer

Management letter

Question 11

If a material subsequent event comes to the auditor’s attention after the financial statements have been issued and management refuses to act, what should the auditor do?

Accepted Answer

Notify regulators or the public that the financial statements should not be relied upon

Question 12

Which of the following is a key item that must be communicated to those charged with governance according to ISA 260?

Accepted Answer

The auditor’s responsibilities under auditing standards

Question 13

During the final evaluation of audit evidence, which of the following is NOT a typical procedure?

Accepted Answer

Calculating the company’s tax liability for the next year

Question 14

Which formula would an auditor use to assess the net realizable value (NRV) of inventory when reviewing subsequent events?

Accepted Answer

$$	ext{NRV} = 	ext{Estimated Selling Price} - 	ext{Estimated Costs of Completion} - 	ext{Estimated Costs to Sell}$$

Question 15

Which of the following best describes the purpose of a legal letter in the audit process?

Accepted Answer

To obtain corroborating evidence regarding litigation, claims, and assessments

Question 16

A company issues new bonds after the SOFP date. How should this event be treated in the financial statements?

Accepted Answer

As a Type 2 subsequent event requiring disclosure

Question 17

Which of the following is a correct step for the auditor when evaluating the entity’s ability to continue as a going concern?

Accepted Answer

Performing final analytical procedures

Question 18

Which equation represents the calculation of a provision for a probable contingency under MFRS 137?

Accepted Answer

$$	ext{Provision} = 	ext{Best Estimate of Expenditure Required}$$

Question 19

Which of the following is NOT a responsibility of the auditor regarding subsequent events as defined by ISA 560?

Accepted Answer

Preparing the company’s tax return for the next fiscal year

Completing the Audit Engagement: Contingencies, Commitments, Subsequent Events, and Auditor Communications

Study Guide - Practice Questions

Study Guide - Flashcards