Question

1. Auditors send a letter to the company’s attorneys to obtain evidence about possible contingent liabilities. What means of gathering evidence is this?

     a. Observation.        

     b. Reperformance.     

     c. Analysis.

d. Inquiry

e. Comparison

2. In discussing audit procedures for contingent liabilities, we ndiscussed the “analysis of legal expense”. Say the auditor asks the controller for the file containing attorney invoices [i.e. bills from lawyers]. In reviewing the invoices, the auditor notes that they sum to [total] $1,000,000, while the amount shown in the general ledger account for “legal expense” totaled $1,500,000. In this context, what did we suggest as the auditor’s chief concern?

    a. Too much is being spent on attorney fees.

    b. There is likely a misclassification of an expense.

    c. The auditor did not receive all the attorney invoices.

    d. Legal expense is overstated.

Answer 1

A1. The correct answer is Option (D) Inquiry

The process mentioned above in the MCQ is known as inquiry. This is not observation as we have directly asked for what we require. We haven't reperformed it so it is not reperformance. We haven't performed any analytical procedures which means it is not Analysis and No comparison is being made.

A2. The correct answer is (D) Legal Expense is overstated

As an auditor's job is the review and make sure that all disclosures made a company in the financial statements are valid and verified so auditor's main concern would be that why is the Legal Expense overstated.

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