MCQ 1 — SA 570 The disclosure that sounds mandatory but isn’t stated that way Zenith Ltd.

MCQ 1 — SA 570

The disclosure that sounds mandatory but isn’t stated that way

Zenith Ltd. is facing severe liquidity problems. The auditor concludes that management’s use of the going concern basis is appropriate, but events and conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern. A material uncertainty exists.

The financial statements disclose the principal events and conditions and management’s plans to deal with them.

During the audit of the disclosures, the following matters are identified:

I. Management’s evaluation of the significance of the identified events and conditions in relation to the entity’s ability to meet its obligations.

II. Significant judgments made by management as part of its assessment of the entity’s ability to continue as a going concern.

III. The magnitude of the potential impact of the identified events or conditions and the likelihood and timing of their occurrence.

IV. The precise percentage probability, determined by management, that the entity will fail to continue as a going concern.

Which of the following most appropriately describes the position under SA 570 (Revised)?

A. I, II and III are relevant disclosure matters, whereas SA 570 does not prescribe disclosure of a precise numerical probability of failure.

B. I and II are relevant disclosure matters, whereas magnitude, likelihood and timing are considered only by the auditor while determining whether the uncertainty is material.

C. II, III and IV are relevant because a material uncertainty requires disclosure of management’s judgments together with quantitative information concerning its probability and potential impact.

D. I, III and IV are relevant because disclosure of management’s evaluation is required together with the magnitude, likelihood and quantified probability of the identified uncertainty.