AICPA Exam CPA-Auditing Topic 1 Question 23 Discussion

Choice 'd' is correct. A written client representation letter should include representations regarding matters that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of business may affect financial statement disclosure, since the results of operations of a component classified as 'held for sale' would be reported separately in the income statement under 'discontinued operations.'

Choice 'a' is incorrect. A client's plan to terminate an employee pension plan would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice 'b' is incorrect. A client's plans to make a public offering of its common stock would not affect recognition, measurement, or disclosure in the current period financial statements.

Choice 'c' is incorrect. A letter from the client's attorney most likely would be an auditor's best source of corroborative information of a client's plans to settle an outstanding lawsuit for an amount less than the accrued loss contingency.