The written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:
A. Discontinue a line of business.
B. Make a public offering of its common stock.
C. Terminate an employee pension plan.
D. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
Answer:A
Choice "A" 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 "C" 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 "D" 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.