Group Ulala (2)

Exercise Chapter 17
Adila Vega Awalin Soba /
008201400002
Elisabet Erika P / 008201400122
Erica Dwi Putri / 008201400032

(17-1) What is meant by a contingency?

Give four examples of contingency.
Answer:
A contingency is a liability that is uncertain
because the possible outflow of resources
from the entity will ultimately be resolved
when some future event occurs or fails to
occur.
Examples of contingent liabilities are
Product
warranties
or
defects
and
Guarantees of obligations to others.

(17-3)
Provide
two
examples
of
commitments. Under what conditions may
such commitments result in the recognation
of a loss in the financial statements?
Answer:
Two examples of long-term commitments are
the purchase of raw materials or the sale of
products at a fixed price. When the fair
market value of the good is less than the
purchase price included in the contract, the
entity may have to recognize a loss on a
long-term commitment even though there
has been no exchange of goods.

(17-4) What are the two types of subsequent events

relevant to financial statement audits? Give two
examples of each type of subsequent event that might
materially affect the financial statements.
Answer:
The two types of subsequent events that require
consideration by management and evaluation by the
auditor relevant to financial statement audits are:
1.Events that provide additional evidence about
conditions that existed at the date of the balance sheet
and affect the estimates that are part of the financial
statement preparation process. These types of events
require adjustment of the financial statements.
2.Events that provide evidence about conditions that did
not exist at the date of the balance sheet but arose
subsequent to that date. These types of events usually
require financial statement disclosure.

Examples of the first type of event or

condition are:
An uncollectible account receivable resulting
from continued deterioration of a customers
financial condition leading to bankruptcy
after the balance sheet date.
The settlement of a lawsuit after the balance
sheet date for an amount different from the
amount recorded in the year-end financial
statements.
Examples of the second type of event or
condition are:
Purchase or disposal of a business by the

(17-5) What is the auditors respondsibility

regarding subsequent events in the period after
the date of the auditors report?
Answer:
The period from the date of the auditors report
to the issuance of the financial statements is
part of the subsequent-events period, but the
auditor is not responsible for making any
inquiries or conducting any audit procedures
after the date of the audit report. However,
subsequent events may come to the auditors
attention during this period and require
adjustments (a Type I event) or disclosure (a
Type II event) in the financial statements.

(17-8) What major catagories of events or

conditions may indicate going-concern problems?
Give two examples for each catagories.
Answer:
- Negative financial trends
Ex. Recurring operating losses and Current-year
deficit.
- Other Financial Difficulties
Ex. Default on loans and Dividends in arrears.
- Internal matters
Ex. Work stoppages and Uneconomic long-term
commitments.
- External matters
Ex. Legal proceedings and Loss of a major
customer or supplier.

(17-7) List the three overall steps in the goingconcern evaluation process.
Answer:
1. Consider whether the results of audit
procedures performed during the planning,
performance, and completion of the audit
indicate whether there is significant doubt about
the entitys ability to continue as a going concern
for same period as that used by management
(minimum twelve months from the balance sheet
date when reporting in accordance with
IASs/IFRSs).
2. If there is significant doubt, the auditor should
obtain information about managements plans to
mitigate the going-concern problem, including a

3. If the auditor concludes, after evaluating

managements plans, that there is significant
doubt about the ability of the entity to continue
as a going concern, he or she should consider
the adequacy of the disclosure about the
entitys ability to continue and, if the disclosure
is adequate, include an emphasis of matter
paragraph in the audit report.

(17-9) Why does the auditor obtain a

representation letter from management?
Answer:
The auditor obtains a representation letter
in order to corroborate oral representations
made to the auditor and to document the
continued
appropriateness
of
such
representations. The representation letter
also
reduces
the
possibility
of
misunderstanding
concerning
the
responses provided by management to the
auditors inquiries.

(17-10) Describe the purpose of the

engagement quality control review.
Answer:
The purpose of an engagement quality
control review is to have an objective
evaluation of significant matters, including
identified risks and significant judgments
made by the engagement team, and the
team's conclusions reached in formulating
the engagement report.

(17-15) For each of the following items, assume

that Josh Feldstein, independent auditor, is
exspressing an opinion on Scrornick Companys
financial statements for the year ended 31
December 2009; and he now is preparing his
opinion to accompany the financial statements.
In each item a subsequent event is described.
These events were disclosed either in conducted
subsequent to year-end audit procedures or in
connection with the review of subsequent
events.
You are to indicate for each item the required
accounting of the event. Each of the five items is
independent of the other four and is to be
considered separately.

1. A large account receivable from

Agronowitz Company was considered partly
collectable at 31 December 2009. Agronowitz
went out of business on 25 January 2010.
Answer:
The bankruptcy of Agronowitz company that
led to the uncollectibility of Scornick
Companys accounts receivable was an event
whose conditions existed at the balance
sheet date. Thus, the 2009 financial
statements should be adjusted to reflect the
uncollectible of accounts receivable.

2. The tax court ruled in favour of the company

on 25 January 2010. Litigation involved
deductions claimed on the 2006 and 2007 tax
returns. In accrued taxes payable Scornick had
provided for the full amount of the potential
disallowances. The tax authorities will not
appeal the tax courts ruling.
Answer:
The tax court ruling in favour of Scornick
Company is an event whose conditions existed
at the balance sheet date and which involves
the revision of an estimate. The 2009 financial
statements should be adjusted to reflect the
favourable ruling.

3. Scornicks manufacturing division,

whose assets constituted 45 per cent of
Scornicks total asset at 31 December
2009, was sold on 1 February 2010. The
new
owner
assumed
the
bonded
indebtedness associated with this property
Answer:
The sale of Scornicks Manufacturing
Division is an event whose conditions did
not exist at the balance sheet date. This
event requires disclosure in the 2009
financial statements.

4. On 15 January 2010, R.E. Fogler, a major

investment adviser, issued a negative
report o Scornicks long-term prospects.
The market price of Scornicks common
stock subsequently declined by 40 per
cent.
Answer:
This is not an event that is considered a
subsequent event for financial statement
purposes.

5. At its 5 January 2010, meeting,

Scornicks board of directors voted to
increase substantially the advertising
budget for the coming year and authorized
a change in advertising agencies.
Answer:
This is not an event that is considered a
subsequent event for financial statement
purposes.