Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

During a review of subsequent events, which procedure is typically performed by an auditor?

1. Investigate significant deficiencies in internal control.

2. Review cut-off bank statements for the post year-end period.

3. Inquire of legal counsel regarding litigation.

4. Analyze related party transactions for irregularities.

The correct answer is: Inquire of legal counsel regarding litigation.

During a review of subsequent events, inquiring of legal counsel regarding litigation is a critical procedure often performed by auditors. This inquiry allows the auditor to gather information about any legal matters that may have arisen since the end of the reporting period but before the financial statements are issued. Such information is essential because it can affect the financial statements in terms of potential liabilities or the need for disclosures regarding pending litigation. Legal counsel can provide insights into ongoing litigations, potential outcomes, and the amounts involved, which are pivotal for determining whether the financial statements present a true and fair view. This process is foundational in ensuring that all material events that could affect the financial statements are adequately considered and reported. In contrast, examining significant deficiencies in internal control, reviewing cut-off bank statements, and analyzing related party transactions focus on different aspects of the audit process. While these are important procedures within the broader scope of an audit, they do not specifically pertain to identifying or assessing subsequent events as directly as inquiring about litigation.