CAF-8 · Chapter 15
Evaluation of Misstatements & Subsequent Events MCQs with Answers
10 multiple-choice questions on Evaluation of Misstatements & Subsequent Events for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A major customer of the client declares bankruptcy on 15 August, providing evidence that they were insolvent at the client's balance sheet date of 30 June. Under IAS 10 and ISA 560, what type of event is this?
- A) An adjusting event requiring the receivable balance to be written down.
- B) A non-adjusting event requiring only a footnote disclosure.
- C) An event that is entirely ignored since it happened in August.
- D) An event that requires the prior year's audit report to be withdrawn.
Show answer & explanation
Answer: A) An adjusting event requiring the receivable balance to be written down.
Adjusting events provide evidence of conditions that already existed at the end of the reporting period. The customer's bankruptcy confirms the debt was bad at year-end, meaning the financial statements must be adjusted to record a bad debt expense.
Question 2
On 20 July, a sudden, massive earthquake destroys the client's uninsured main factory. The client's year-end is 30 June. Assuming the company is still a going concern, how should this be treated in the June 30 financial statements?
- A) The asset must be fully depreciated retroactively to January 1.
- B) The asset's value must be written down to zero in the June 30 balance sheet.
- C) It is a non-adjusting event; if material, its nature and financial effect must be disclosed in the notes.
- D) The auditor must resign immediately due to the loss of physical evidence.
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Answer: C) It is a non-adjusting event; if material, its nature and financial effect must be disclosed in the notes.
A natural disaster after the reporting date is a classic non-adjusting event because the condition (the earthquake) did not exist at June 30. The balance sheet figures remain unchanged, but the massive loss must be disclosed so users are aware.
Question 3
During the period between the balance sheet date and the date the audit report is signed, what is the auditor's responsibility regarding subsequent events?
- A) The auditor has no responsibility whatsoever.
- B) The auditor must perform active procedures (e.g., reading minutes, inquiry) to obtain evidence that all events requiring adjustment or disclosure have been identified.
- C) The auditor must re-audit the entire year's transactions.
- D) The auditor only relies on whatever management volunteers to tell them.
Show answer & explanation
Answer: B) The auditor must perform active procedures (e.g., reading minutes, inquiry) to obtain evidence that all events requiring adjustment or disclosure have been identified.
Up to the date of the audit report, the auditor has an 'active' duty to design and perform specific procedures (reading minutes, reviewing interim financials, inquiring) to identify any material subsequent events.
Question 4
After the financial statements have been formally issued to the public, the auditor discovers a massive fraud that existed at year-end which would have changed the audit opinion. What is the auditor's first step?
- A) Publish a retraction in the national newspaper.
- B) Discuss the matter with management and determine if the financial statements need amending.
- C) File a lawsuit against the directors.
- D) Do nothing, because the auditor's responsibility ended when the report was signed.
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Answer: B) Discuss the matter with management and determine if the financial statements need amending.
Even after issuance, if the auditor discovers facts that existed at the report date that would have changed the opinion, they must discuss it with management, assess if amendment is needed, and inquire how management plans to address it.
Question 5
If management amends the financial statements for a specific subsequent event after the original audit report was signed, the auditor may use 'Dual Dating' (e.g., '14 August, except for Note X, which is 6 September'). What does this signify?
- A) That two different audit firms signed the report.
- B) That the auditor's responsibility for subsequent events beyond the original date is restricted solely to the specific amended item.
- C) That the audit took two full years to complete.
- D) That the auditor is disclaiming an opinion on the amended note.
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Answer: B) That the auditor's responsibility for subsequent events beyond the original date is restricted solely to the specific amended item.
Dual dating limits the auditor's liability. It indicates that the auditor completed their active review of all subsequent events up to the first date, but extended their procedures ONLY for the specific amended note up to the second date.
Question 6
An auditor uses statistical sampling to test inventory and projects that the total population misstatement is Rs. 4 million. Which category of misstatement does this represent?
- A) Factual misstatement
- B) Judgmental misstatement
- C) Projected misstatement
- D) Fraudulent misstatement
Show answer & explanation
Answer: C) Projected misstatement
Misstatements are categorized into three types: Factual (no doubt it's an error), Judgmental (differences in accounting estimates or policies), and Projected (the auditor's best estimate of total errors in a population extrapolated from a sample).
Question 7
If management persistently refuses to correct multiple misstatements identified by the auditor, what is the auditor required to do before forming the final audit opinion?
- A) Automatically withdraw from the audit engagement.
- B) Evaluate whether the uncorrected misstatements are material, individually or in aggregate, and modify the opinion if they exceed materiality.
- C) Secretly log into the client's software and post the adjusting journal entries.
- D) Call the police to report a crime.
Show answer & explanation
Answer: B) Evaluate whether the uncorrected misstatements are material, individually or in aggregate, and modify the opinion if they exceed materiality.
The auditor must accumulate uncorrected misstatements and assess their aggregate impact against the predetermined materiality threshold. If the total exceeds materiality and management still refuses to correct them, a qualified or adverse opinion is issued.
Question 8
According to ISA 580, what is the correct timing for the date on the 'Written Representation' letter provided by management?
- A) Exactly six months before the year-end.
- B) The same date the audit planning phase begins.
- C) As near as practicable to, but not after, the date of the auditor's report.
- D) Six months after the financial statements are published.
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Answer: C) As near as practicable to, but not after, the date of the auditor's report.
Written representations cover the entire financial year up to the point the auditor signs off. Therefore, they must be dated as close as possible to the date of the auditor's report, ensuring management takes responsibility for all subsequent events up to that day.
Question 9
If a written representation provided by management is directly contradicted by other reliable audit evidence gathered (e.g., management says a lawsuit is won, but the lawyer's letter says it is lost), what is the auditor's responsibility?
- A) Always trust the written representation, as management is the ultimate authority.
- B) Perform audit procedures to resolve the inconsistency, and re-evaluate the integrity of management and the reliability of all other representations.
- C) Ignore the lawyer's letter completely.
- D) Issue an unmodified opinion immediately to avoid conflict.
Show answer & explanation
Answer: B) Perform audit procedures to resolve the inconsistency, and re-evaluate the integrity of management and the reliability of all other representations.
If a representation contradicts other evidence, it raises severe doubts about management's honesty. The auditor must investigate the discrepancy and critically reassess whether they can trust any other statements management has made during the audit.
Question 10
Management absolutely refuses to provide the fundamental written representation acknowledging their responsibility for preparing the financial statements and providing the auditor with all information. What is the mandatory reporting consequence?
- A) Issue a qualified opinion.
- B) Issue an unmodified opinion with an Emphasis of Matter.
- C) Disclaim an opinion on the financial statements.
- D) Issue an adverse opinion.
Show answer & explanation
Answer: C) Disclaim an opinion on the financial statements.
Under ISA 580 and ISA 705, if management refuses to provide the core representations confirming their fundamental responsibilities (the very premise of an audit), the auditor cannot rely on any evidence and must disclaim an opinion.