ACC 400 Ch 24
REVIEW FOR CONTINGENT LIABILITIES AND COMMITMENTS Auditor's primary objectives in verifying contingent liabilities: •Evaluate the accounting treatment of known contingent liabilities to determine whether management has properly classified the contingency (_____________________________). •Identify to the extent practical any contingencies not already identified by management (________________________________).
- classification presentation and disclosure objective - completeness presentation and disclosure objective
Likelihood of Occurrence and Financial Statement Treatment - remote =___________________ -reasonably possible = ___________________ - probable = if the amount can be reasonably estimated, _________________, if the amount cannot be reasonably estimated ________________ is necessary
- no disclosure is necessary -footnote disclosure is necessary - f/s accounts are adjusted, footnote disclosure
REVIEW FOR SUBSEQUENT EVENTS Audit Tests: The second category are performed specifically to obtain information to incorporate into the current year's account balances or footnotes as tests of the completeness presentation and disclosure objective. These include: •Review ______ prepared subsequent to the _____________ •Review _______________ prepared subsequent to the __________ •Examine _______ issued subsequent to the balance sheet date. •___________________. •__________________. •Obtain a letter of ______________(mandatory).
-records, balance sheet date. - internal statements, balance sheet date. - minutes -Correspond with attorneys -Inquire of management -representation
REVIEW FOR SUBSEQUENT EVENTS Two types of subsequent events require consideration by management and evaluation by the auditor: •Type 1: •Type 2:
1. Those that have a direct effect on the financial statements and require adjustment 2. Those that do not have a direct effect on the financial statements but for which disclosure may be required
REVIEW FOR SUBSEQUENT EVENTS Audit Tests: There are two categories of audit procedures for the subsequent events review: 1.Procedures normally integrated as a part of the verification of ________________________ 2.Procedures performed specifically for the purpose of discovering _________________ that must be recognized as subsequent events The first category includes ________ and ________ tests done as part of the tests of details of balances.
1. year-end account balances 2. events or transactions cutoff , valuation
FINAL EVIDENCE ACCUMULATION Auditing standards suggest four categories of specific matters that should be included in Management Representation Letter: 1. 2. 3. 4. PCAOB auditing standards require the auditor to also obtain written representation from management regarding internal control over financial reporting.
1.Financial statements 2.Completeness of information 3.Recognition, measurement, and disclosure 4.Subsequent events
FINAL EVIDENCE ACCUMULATION Perform Final Analytical Procedures: ________________________________________________________________________ It is common for a partner to do analytical procedures during the final review of the audit documentation. Results from final review may indicate that additional audit evidence is necessary.
Auditing standards require auditors to perform analytical procedures during the completion of the audit.
Management Letters: A management letter is intended to inform client personnel of the __________________for improving any part of the client's business (optional).
CPAs recommendations
EVALUATE RESULTS _________________________: An essential part of evaluating whether the financial statements are fairly stated involves the auditor's review of the summary of misstatements found in the audit. In addition to known misstatements, the auditor must consider possible misstatements.
Evidence Supports Auditor's Opinion
EVALUATE RESULTS __________________: Before completing the audit, auditors must make a final evaluation of whether the disclosures in the financial statements satisfy all presentation and disclosure objectives.
Financial Statement Disclosures
EVALUATE RESULTS ____________________: Evaluate whether there is sufficient appropriate evidence and whether evidence supports the opinion on the financial statements.
Summary of Evidence Evaluation
ISSUE THE AUDIT REPORT The auditor should wait to decide the appropriate audit report to issue until all evidence has been _____________ & ________________, including all steps of completing the audit.
accumulated and evaluated,
FINAL EVIDENCE ACCUMULATION Evaluate Going-Concern Assumption: Auditing standards require the auditor to evaluate whether there is a substantial doubt about a client's ability to continue as a going concern at least one year beyond the balance sheet date. •Auditors use __________________, discussions with management, and their knowledge of the client's business to assess the likelihood of ______________________ •A _________________ of the entity's going-concern status is desirable after all evidence has been _____________ &_____________ audit adjustments have been incorporated into the financial statements.
analytical procedures, Financial failure within one year. final assessment, accumulated and proposed
FINAL EVIDENCE ACCUMULATION Three purposes of the Management Representation Letter: 1.Impress upon management its responsibilities for the _______ in the _____________. 2.________ management of potential ____________ or ____________ on the financial statements. 3.Document the responses from ___________ to ________ about various aspects of the audit.
assertions, financial statements Remind, misstatements or omissions management to inquiries
Audit Procedures for Finding Contingencies: (continued) •Obtain a letter from each major _______ performing legal services for the _________ as to the status of pending litigation or other contingent liabilities. •Review ______ __________ for any information that may indicate a potential contingency. •Examine letters of ______ in force as of the balance sheet date and obtain a confirmation of the used and unused ________
attorney , client audit documentation credit, balances.
Communicate Fraud and Illegal Acts: Auditing standards require the auditor to communicate in writing all fraud and illegal acts to the _____________ or equivalent, regardless of materiality. Communicate Internal Control Deficiencies: The auditor must communicate in __________ significant internal control deficiencies and material weaknesses in the design or operation of internal control to those charged with __________.
audit committee writing, governance
EVALUATE RESULTS Sufficient Appropriate Evidence: To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor reviews the ______________ for the entire audit to determine whether all material classes of _____________, ______________, and ________________ have been adequately tested. Auditors often use a __________________, which is a reminder of items that may have been overlooked.
audit documentation , transactions, accounts, and disclosures completing the audit checklist
Other Communications with Audit Committee: Auditing standards require the auditor to communicate certain additional information to those charged with governance. There are four principal purposes of these required communications: 1.Communicate __________ in the audit of financial statements. 2.Provide an overview of the _________ & __________ of the audit. 3.Provide those charged with governance with ____________ arising during the audit. 4.Obtain from those charged with governance information __________ to the audit.
auditor responsibilities scope and timing significant findings relevant
REVIEW FOR SUBSEQUENT EVENTS Dual Dating: Occasionally the auditor determines that a subsequent event that affects current period financial statements occurred after the date of the audit report but __________________ In that situation, auditing standards require the auditor to extend audit tests for the newly discovered subsequent event. The auditor has two equally acceptable options for doing so: 1.Expand all subsequent events tests to the new date—with this option, the auditor simply ___________________ 2. Restrict the subsequent events review to matters related to the new subsequent event—with this option, the auditor ____________________
before the audit report was issued. 1. changes the report date to the new date. 2. issues a dual-date audit report.
COMMUNICATE WITH THE AUDIT COMMITTEE AND MANAGEMENT
communicate fraud and illegal acts communicate internal control decencies
FINAL EVIDENCE ACCUMULATION Read Other Information in the Annual Report: Auditing standards require the auditor to read other information included in the annual reportpertaining directly to the financial statements. •Auditor responsibility to read other information included in annual report pertains only to information that is not part of the ____________ but is published with them. •If the auditor concludes that a material inconsistency exists, they should request the client to _______ the information. If the client refuses, the auditor should include an explanatory paragraph in the __________ or withdraw from the engagement.
financial statements change, audit report
REVIEW FOR CONTINGENT LIABILITIES AND COMMITMENTS Three conditions are required for a contingent liability to exist: 1.There is a potential __________ ________ to an outside party or the impairment of an asset that resulted from an existing condition. 2.There is uncertainty about the ________ of the future payment or impairment. 3.The outcome will be resolved by some future ______
future payment amount event(s)
EVALUATE RESULTS Engagement Quality Review: At the completion of larger audits, it is common to have the financial statements and entire set of audit files reviewed by a completely _________ _________ who has not participated in the audit. •An engagement quality review is required for SEC engagements, including the review of _________________ and the audit of _______________________. This reviewer often takes an adversarial position to make sure the audit was adequate.
independent reviewer interim financial information, internal controls
EVALUATE RESULTS Audit Documentation Review: Three reasons why an experienced member of the audit firm must thoroughly review audit documentation at the completion of the audit: 1.Evaluate the performance of ________________ 2.Make sure that the audit meets the ________________________ 3.Counteract the _______ that often enters into the auditor's judgment. Except for final independent review, the review of audit documentation should be conducted by someone who is knowledgeable about the client and the circumstances of the audit.
inexperienced personnel. CPA firm's standard of performance. bias
Continued.. One of the auditor's primary concerns related to presentation and disclosure is determining whether management has disclosed all required _________ (completeness).
information
FINAL EVIDENCE ACCUMULATION Consider Supplementary Information in Relation to Financial Statements as a Whole: Clients often include additional ________ beyond the basic financial statements. Auditors must clearly distinguish their _______ &_________ responsibility for the primary financial statements and for supplementary information.
information audit and reporting
FINAL EVIDENCE ACCUMULATION Obtain Management Representation Letter: Auditing standards require the auditor to obtain written representations from management, usually in a ____________________ documenting management's most important oral representations made during the audit. •This letter is prepared on the _____________, addressed to the_______, and signed by high-level _________ •The letter should be dated no earlier than the date of the ____________ to ensure that there are adequate representations about subsequent events.
letter of representation client's letterhead , CPA, corporate officials. auditor's report
PERFORM ADDITIONAL TESTS FOR PRESENTATION AND DISCLOSURE As part of Phase IV of the audit, auditors evaluate evidence they obtained during the first three phases of the audit and perform additional procedures for ___________ and ___________________ objectives
presentation disclosure-related
Sarbanes-Oxley requires additional communications for auditors of _____________. As the audit is completed, the auditor should determine that the audit committee is informed about the initial selection of and any changes in significant accounting policies.
public companies
SUBSEQUENT DISCOVERY OF FACTS Although rare, auditors sometimes learn after the audited financial statements have been issued that the financial statements are materially misstated. When this subsequent discovery of facts occurs, the auditor has an obligation to make certain that users who are relying on the financial statements are informed about the misstatements or change in the conclusion on the effectiveness of internal controls. •Request that the client issue an immediate _________ of the ____________ that includes an explanation of the reason for the revision •Client should inform _______ & other regulatory agencies •If client refuses, auditor must inform _______________ & _________________
revision, financial statements SEC BOD and regulatory agencies
REVIEW FOR CONTINGENT LIABILITIES AND COMMITMENTS Audit Procedures for Finding Contingencies: •Inquire of management about the possibility of ________ __________ •Review current and previous years' internal revenue agent reports for _________ ________ settlements. •Review the minutes of directors' and stockholders' meetings for indications of _________ or other ____________ •Analyze legal expense for the period under audit for indications of _________ __________, especially lawsuits and pending tax assessments.
unrecorded contingencies. income tax lawsuits, contingencies. contingent liabilities