ACC450 - Chapter 16

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:

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

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:

February 10, 20X9.

Asserted Claims

existing lawsuit

Unasserted Claims

lawsuits thats have not been filed

What if something happens during the Report Preparation Period? (C)

-Adjust (for Type I) -Dual date the report

Management Representation Letter

-Auditor Prepares this, Management Signs it -Summarizes most important oral representations made during the year 1. All info made available to auditor 2. F/S are complete and follow GAAP 3. All necessary items have been disclosed 4. Adjusting entries are immaterial

Management Letter:

-Marketing Letter -Auditors make recommendations to client

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?

A substantial portion of the company's inventory was written off as obsolete on January 31.

Which of the following is not correct concerning a type I and a type II subsequent event?

A type II event may require adjustment to the financial statements and a type I may require note disclosure.

Contingency Losses: Probable - Reasonably Estimable

Adjust F/S

Subsequent Event: A lawsuit that was begun a year ago is settled.

Adjusted (Type I)

Subsequent Event: On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.

Adjusted (Type I)

Time Segment: D

After Report (3/22/18 - )

What date is used for the Management Representation Letter?

Audit Report Date (last day of field work)

Engagement Completion Document

Auditor must complete this to identify significant findings or issues, actions taken to address them, and the basis for the conclusions reached. (public companies only) -Ex: adjustments, disagreements, accounting principles, existence of misstatements, circumstances that caused difficulties

Who should the auditor contact if they want information about the contingencies/lawsuits?

Client's Attorney/Lawyer's Letter

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

Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the:

Date of the auditors' report.

What if the management doesn't sign it?

Disclaimer of opinion (Scope Limitation)

Subsequent Event: A new subsidiary is purchased

Disclosed (Type II)

Subsequent Event: A plant of the company is destroyed by a fire

Disclosed (Type II)

Subsequent Event: A significant decline in the value of inventories occurs

Disclosed (Type II)

Subsequent Event: On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.

Disclosed (Type II)

Subsequent Event: On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.

Disclosed (Type II)

Subsequent Event: On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.

Disclosed (Type II)

Contingency Losses: Probable - Not Reasonably Estimable

Disclosure

Contingency Losses: Reasonably Possible

Disclosure

Required Supplementary Information

FASB and GASB may require companies to include non-audited information in the F/S to summarize results

What is required in the wrap-up procedures?

Final Analytical Procedures (cold partner review)

Evaluation of Audit Findings to support an opinion:

Includes both Quantitative and Qualitative information

Time Segment: A

Interim (1/1/17 - 12/31/17)

The aggregated misstatement in the financial statements is made up of:

Known Misstatements - Yes Projected Misstatements - Yes Other Misstatements - Yes

What is the date of the audit report?

Last day of field work (at client) - right in the middle of (A---B-*-C---D)

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

Loss contingency.

Subsequent Event: On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.

No Disclosure

Subsequent Event: A major customer of the company is lost

Not Disclosed

Subsequent Event: An employee strike is called

Not Disclosed

Contingency Losses: Remote

Nothing

Which of the following procedures is normally performed last?

Obtaining a management representation letter.

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

Perform analytical procedures.

What if the client's lawyer does not respond?

Put the responsibility on the client (Scope Limitation)

Time Segment: C

Report Preparation (3/15/18 - 3/22/18)

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

Settlement of litigation.

Time Segment: B

Subsequent Period (12/31/17 - 3/15/18)

Which of the following is true?

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the audit report release date.

Should uncorrected errors from previous years be corrected?

Yes

The date of the management representation letter should coincide with the:

date of the auditor's report.

Significant defecencies must be communicated to:

the audit committee in writing (whether or not they are material weaknesses)

Material weaknesses must be communicated to:

the audit report on internal control

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:

the auditors' report.

Type II - Examples:

-Fire/flood -Early retirement of bonds payable -Sale of bond or capital stock issue -Purchase of a business (it's YES/NO) -Litigation that arises after B/S date

Neither - Examples:

-New line of products -Death of company treasurer

What if something happens After Report (D)?

-Restatement of F/S -Likely will lose client -Inform B of D, audit committee, SEC, F/S users

Type I - Examples:

-Settlement of a Lawsuit (1/15/18) -Two customers go bankrupt (1/24/18) -Manufacturing Problems - Warranties (2/3/18)

Other Information

-financial and non financial information included in the audited F/S -Include a paragraph about the other information if it is incorrect