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____ 22
____ 22. Which of the following types of matters do not generally require disclosure in the financial statements?
A. General risk contingencies
B. Commitments
C. Loss contingencies
D. Liabilities to related parties
_____ 23. A refusal by a lawyer to refusal information related to litigation included in the letter of inquiry is likely to result in:
A. Confirmation of related lawsuits with the claimants.
B. Qualification of the audit report
C. An assessment that loss of the litigation is probable
D. An adverse opinion.
_____ 24. When a client declines to disclose essential information in the financial statements or notes, the CPA should:
A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit
B. Provide the information in the audit report, if practicable and qualify the opinion because of a departure from GAAP.
C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure.
D. Issue and unqualified opinion, but inform the reader by including the omitted information in the audit report
_____ 25. When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:
A. Issue and unqualified report with an explanatory paragraph
B. Withdraw from the engagement
C. Issue an "Except for" qualification or an adverse opinion.
D. Issue an "except for" qualification or a disclaimer of opinion.
Expert Solution
22. General risk is something which all businesses face, but that isn't defined enough to note disclosure in the financial statements. I considered d. as the answer until I thought of Enron...
23. The lack of confirmation from an attorney could result in a qualification in the opinion. It would depend on the circumstances, but obviously there must be an issue lurking within this company. If the issue was readily apparent and documents revealed the progress of it, an adverse opinion might be required, but given what we know, I think a qualification is right.
24. These circumstances clearly define a scope limitation as mentioned in a. If it was serious enough, the opinion might be a disclaimer or an adverse.
25. Again there could be some discussion based on the nature of the material departure. I suspect the question wants you to answer with an "except for" qualification or a disclaimer of opinion, but both b and c are possibilities depending on the circumstances.
Auditing is not an exact science as some other areas of accounting are. It runs more to opinion and circumstances, which may account for why there have been such big troubles with World Com,
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