ATG 457 CH 16

~The date when the auditors have completed their work and obtained sufficient audit evidence. ~Includes time to draft the report.

-Audit report date/Management Rep Letter date -Audit release date

probable . reasonably

In FASB 450-20. "loss contingencies" the financial accounting standard board states that contingent liabilities should be reflected in the accounting recorded when info available prior to the issuance of fin. statements indicates that a loss is ___, and that the amount of the loss can be ___ estimated.

Legal letter date should be very close to Audit Report Date If it comes in Later—change audit report date (you aren't really done with the audit yet!) If it comes in Before - contact attorney to get a verbal update

Legal letter/letter of inquiry

Auditors often refer to it as the Legal Letter. Attorneys often refer to it as the Auditor Letter. Let's look at an example.............. Note: Threatened litigation=Unasserted claims=legal action not yet taken

Letter of Inquiry

A possible loss stemming from past events. A possible liability that a company has incurred. A future cost to a company. Also called "contingent liability"

Loss contingencies

Settlement of litigation.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?

be disclosed in a note to the fin. statements

a loss contingency that is reasonably possible and can be reasonably est. should :

contingency

a possible loss stemming from past events that will be resolved by some future event is called a loss ___

projected

auditors' est of misstatements arising from audit sampling conclusions concerning populations result in ___ misstatements

identified misstatements

throughout the course of the audit, the auditors accumulate and communicate to management all ___ ___, other than those the auditors believe to be trivial

AICPA

Obtain or prepare analyses of selected expense accounts Which expense accounts? -Advertising -Research and development -Maintenance and repairs -Professional fees (legal and other) -Miscellaneous expense -Others according to analytical review

Review detail and test significant travel and entertainment expense

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

false

dual-dating the audit report is required whenever a subsequent event occurs after the date of the audit report but before the report release date

-Factual misstatements ---Specific misstatements identified during the course of the audit for which there is no doubt -Judgmental misstatements ---Differences arising from judgments of management that the auditor consider incorrect. -Projected misstatements ---Arise from sample results projection to population. ***Even Factual misstatements might not be booked due to immateriality.

misstatements

Purpose is to have the client's principal officers (management) acknowledge that they are primarily responsible for the fairness of the financial statements

Completing the Audit - Obtain Representation Letter

registration statement

the securities act of 1933 extends the auditors' liability in connection with the registration of new securities with the SEC to the effective date of the ___ ___.

loss contingency

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):

consider the possibility of a misstatement in the fin. statements

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:

1. Review the minutes of directors' meetings to the date of completion of fieldwork. 2. Send letter of inquiry to client's legal counsel for litigation. 3. Review reports and correspondence from regulatory agencies to identify potential assessments or fines. 4. Obtain a representation letter from the client indicating that all liabilities known to officers are recorded or disclosed. (discussed in chapter 5 and we will talk more about it in a few slides)

Audit Procedures for Loss Contingencies

¨Review latest available financial reports/statements ¨Review the minutes of the board and selected committees ¨Inquiry of management ¨Obtain lawyer's letter ¨Obtain representations from management

Audit Procedures to Identify Subsequent Events

vExpense analysis vRepresentation Letter vLoss Contingencies vSubsequent Events vMisstatements and adjustments vDisclosure Checklist vCommunicate with Management

Completing the Audit

What do the auditors communicate??? ¨Fraud and Illegal Acts ¨Significant deficiencies and material weaknesses ¨Auditor's responsibility—the opinion; versus management's responsibility—FS ¨Significant findings from the audit ¡Audit difficulties encountered ¡Uncorrected misstatements ¡Disagreements with management ¡Auditor independence issues

Required--Communication with Those Charged with Governance

false

The CPA's opinion on the fairness of the financial statements may not be changed based on events after the balance sheet date

regulatory

audit procedures to detect and evaluate loss contingencies include reviewing reports and correspondence from ___ agencies to identify potential assessments or fines.

commitments

closely related to contingent liabilities are obligations termed ___, which include agreements to purchase inventory or sell merchandise at specified prices

they must conclude there is a low risk of material misstatement

for the auditors to issue an unmodified opinion:

confirm by direct communication with the purchaser or assignee

if the client has sold or assigned any rec, the auditor must:

¨Loss contingencies should be reflected in the financial statement amounts (JE) and disclosed when: ¡It is probable that a loss had been sustained before the balance sheet date; AND ¡The amount of the loss can be reasonably estimated ¡ JE and NOTE

loss contingencies continued...

NO DISCLOSURE Loss contingencies need not be disclosed when the possibility of loss is remote FOOTNOTE ONLY (possibly include $ amount) Loss contingencies should be disclosed in the notes to the financial statements when it is at least reasonably possible that a loss has been sustained

loss contingencies continued:

remote reasonably possible probable

loss contingencies: the spectrum

¨Litigation ¨Income tax disputes with Fed or State ¨Environmental issues (cleanup) ¨Commitments/future obligations ¡Commitment to sell product at a set price ¡Inventory purchase commitments at specific prices ¡Contracts for construction of buildings

loss contingency examples

be disclosed in a note to the fin. statement

shortly after year end a clients customer suffered a major fire which resulted in the customer filing for bankruptcy. as a result, a large account outstanding at year end is now uncollectible. this subsequent event should:

2 types -- type 1 adjustments (JEs) -- type 2 possible disclosure

subsequent events

both the rollover and iron curtain for materiality

the SEC Staff accounting Bulletin No. 108 requires that in considering the effects of prior year uncorrected misstatements, the auditor must review the:

professional fees

the analysis of the ___ account furnishes the names of attorneys to whom letters should be sent requesting info as to pending litigation and other loss contingencies

representation

the primary purpose of the ____ letter is to have the clients principal offers acknowledge that they are primarily responsibly for the fairness of the fin. statements.

aggregated

the relationship btw the ___ (known and likely) misstatements and materiality is often doc in a working paper.

working papers

the review of the work of the audit staff is primarily accomplished through a review of the:

a bus combination w/ a competing company after the balance sheet date

which of the following sub events requires disclosure in the notes to the fin. statements?

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:

managements

auditors should obtain an understanding of ____ procedures to ensure that subsequent events are identified

analytical

auditors should perform ___ procedures to test the reasonableness of payroll expense

-search unrecorded liabilities -review the min of meetings -perform financial analytical procedures -perform procedures to identify loss contingencies -perform the review for subsequent events -obtain the representation letter -communicate misstatements to management -evaluate audit findings

procedures at the end of the audit include:

.01 The auditor's report should not be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion.

1) Audit report date/Management Rep Letter date (AU-C530)

projected misstatement

The auditors used statistical sampling for the audit of inventory and calculated an estimated total audited value of $1,100,000; the client's book value for inventory is $1,200,000. This misstatement is properly classified as a:

test whether employee time reports are approved by supervisors

Which of the following is least likely to be considered a substantive procedure relating to payroll?

customer checks deposited prior to year-end but determined to be uncollectible after year-end

Which of the following is most likely to be considered a Type 1 subsequent event?

make a surprise observation of the company's regular distribution of paychecks on a test basis.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?

performing analytical procedures

Which of the following procedures is most likely to be included near completion of an audit?

an adj to the fin statement amount

a subsequent event that provides additional evidence as to conditions that existed at the balance sheet date and affects the est. inherent in the process of preparing fin. statements requires: