Ch. 16

contingent liabilities

most loss contingencies are also called what? possible existence of liabilities

loss

recognition of what either involves recognition of liability or reduction of asset?

income tax returns

substantive procedure for critical expense that cannot be verified in audit of balance sheet accounts; analysis of this requires schedules for officers' salaries, directors' fees, taxes, travel/entertainment, contributions, & casualty losses

extrapolation differences

type of likely misstatement; projected misstatements determined by use of sampling

comparative income statement

working paper that compares major income statement categories for the yr under audit w/ prior yr amounts and industry averages

Subsequent Event

An event occurring after the date of the balance sheet but prior to completion of the audit and issuance of the audit report

measurement of income

accountants generally agree this is the most important single function of accounting

payroll work

division of duties among (1) human resources, (2) timekeeping, (3) payroll prep and record keeping, and (4) distribution of pay to employees is the most important controls

representation letter

does NOT stand alone as evidence; purpose of this is for mngt to acknowledge they are primarily responsible for fairness of stmts

type 2 subsequent event

events do not require adjustments to dollar amounts in stmts, but should be disclosed in notes if otherwise would be misleading

Securities Act of 1933

extends auditors' responsibility in connection w/ registration of new securities w/ SEC to effective date of registration statement

dual-date

extends the auditors' responsibility for disclosure through the later date for only specified item

neutral

financial statements should be this instead of understate financial position and operating results; FASB rejected conservatism bc it is inconsistent with this concept

payroll

for many companies, this is the largest operating cost; deserves close attention of mngt and auditors

litigation

most common loss contingency appearing on financial statements is that stemming from actual or potential ______

other information

no inconsistencies found in _____= auditors not required to reference, but can include an other-matter paragraph w/ opinion

analytical procedures

should be performed at end of audit; help auditors assess validity of conclusions reached (including opinion), identify areas that need further examination, provide consideration of info gather in response to unusual/unexpected relationships

recourse

accounts receivable sold or assigned with _____ guarantees collectability

unasserted claims

this should be on list of letter of inquiry if legal counsel has devoted substantive attention to it and (1) PROBABLE a claim will be asserted (2) REASONABLY POSSIBLE that loss will result

effective budgeting program

this will reduce the risk of material misstatement by providing info on expected expense amounts; more likely to find errors bc of discrepancy b/w budgeted and actual amounts; budgeting amounts provide auditors w/ good expected expense amounts

Letter of Inquiry of the Client's Lawyer

A letter sent by auditors to a client's legal counsel requesting a description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies.

Disclosure Checklist

A list specific disclosures required by the FASB, the GASB, the FASAC, and the SEC that is used to evaluate the adequacy of the disclosures in a set of financial statements

Unasserted Claim

A possible legal claim of which no potential claimant has exhibited an awareness.

Conservatism

An accounting doctrine for asset valuation in which the lower of two alternative acceptable asset valuations is chosen

Rollover Approach

An approach to making materiality judgements that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year

Iron Curtain Approach

An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.

General Risk Contingency

An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. Not disclosed in the financial statements

Report Release Date

The date the auditors grant the client permission to use the audit report in connection with the financial statements. This is sometimes referred to as the date of issuance of the audit report

miscellaneous revenue

a mixture of minor items, some nonrecurring and others likely to be received at irregular internals

effective date

auditors' liability extended to _____; date of which securities may be sold to the public

commitments

contractual obligation to enter into transactions in the future; this obligation is closely related to contingent liabilities

Other Matter Paragraph

A paragraph included in the auditors' report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgment, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report

Emphasis of matter Paragraph

A paragraph included in the auditors; report that is required by GAAS or is included at the auditors' discretion, and the refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users; understanding of the financial statements

Contingent Liability

A possible liability, stemming form past events, that will be resolved as to existence and amount by some future event

Loss Contingency

A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. Disclosed in the notes to the financial statements if there is a reasonable possibility that a loss has been incurred. When they are considered probable and can be reasonable estimated, they should be accrued in the accounts

Representation Letter

A single letter or separate letters prepared by officers of the client company at that auditors' request setting forth certain representations about the company's financial position or operations

Other Information

Financial and nonfinancial information (other than the financial statements and the auditors' report thereon) that is included in a document containing audited financial statements and the auditors' report thereon but is not required by a designated accounting standards setter

Known misstatements

Specific misstatements identified by the auditors during the course of the audit

Commitment

A contractual obligation to carry out a transaction at specified terms in the future. Material ones should be disclosed in the financial statements

Minutes

A formal record of the issues discussed and actions taken in meetings of stockholders and the board of directors

pro forma financial statements

if subsequent event is so material this should be prepared, giving affect to events as if they had occurred as of balance sheet date

S-1 Review

Procedures carried out by auditors at the client company's facilities on or as close as practicable to the effective date of a registration statement filed under the Securities Act of 1933

lawyer's letter

letter to auditors in return to letter of inquiry of client's lawyer

required supplementary information

required to be presented as unaudited supplementary schedules accompanying finan stmts

type 1 subsequent event

requires that financial statements be adjusted to reflect changes in estimates resulting from additional evidence

uncertainty

this idea is central to loss contingency; relates to both amount of loss and if the loss has been incurred; resolved when future event does or does not occur

emphasis-of-matter paragraph

this is added to stmts with opinion to provide assurance on whether supplemental info is or is not fairly stated

loss contingencies

this is reflected in acct records when (1) info available prior to issuance of statements indicates PROBABLE a loss has been incurred before balance sheet date (2) amount of loss can be REASONABLY ESTIMATED

revenue accounts

this is verified by auditors in conjunction with the audit of a related asset or liability

professional fees analysis

this may disclose legal and audit fees properly chargeable to costs of issuing stock of debt instruments, or to costs of business combinations; furnishes names of attorneys to request letters to about pending litigation & other loss contingencies

Analytical Procedures

Evaluations of financial information made by a study of plausible relationships between financial and nonfinancial information

Supplementary Information

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. Such information may be presented in a document containing the audited financial statements or separate from the financial statements

Required supplementary information

Information that a designated accounting standards setter requires to accompany an entity's basic financial statements.

scrap sale

an item improperly included as miscellaneous revenue that its proceeds generally should be applied to reduce COGS

Likely misstatements

Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates

other information

if inconsistencies found in _____= (1) other-matter paragraph added w/ unmodified opinion (2) withholding auditors' report (3) withdrawing from engagement

general risk contingencies

in addition to loss contingencies and commitments, all businesses face risk of loss from numerous factors called what? loss that might occur in future; are not disclosed in stmts

accounting estimate differences

likely misstatements that are differences b/w management and auditors' judgment on estimates

payroll fraud

listing fictitious persons, overpaying employees, and continuing listing employees after they separated from the company

loss contingency

possible impairment of assets and possible existence of liabilities; stemmed from past events that will be resolved as to existence and amounts by some future event; possible loss

conservatism

powerful force influencing decision of revenues and expenses; when applied to the income statement, this results in a low income number

letter of inquiry

sent by auditors to client's legal counsel requesting description and evaluation of pending or threatened litigation, unasserted claims, and other loss contingencies

loss contingencies

should be disclosed in a note to finan statements if ____ does not meet two conditions & there is at least a REASONABLE POSSIBILITY that loss has been incurred