Assignment
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 a potential liability exists now, but some future event must occur before the amount and certainty of the liability will be known for sure.
3) The text describes two different types of subsequent events: type 1 and type 2.
a) What is the difference between a type 1 and type 2 subsequent events 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.
b) Where are some places auditors might look to find subsequent events of either type? Provide at least three examples.
4) 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.
5) 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.