ACC 450 Chapter 16

How are Type I events handled?

Adjustments to F/S

On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory. What would this subsequent event result in?

Disclosure

What is the auditor's responsibility with omitted procedures?

Go back and complete omitted procedures

Recipient of letter of inquiry:

Outside legal counsel

Projected misstatements

The most likely amount of misstatement in the area being sampled

What type of event is litigation that arises subsequent to the B/S date?

Type II

Management representation letter

A written letter of representations that an auditor obtains from the client; the letter summarizes the most important oral representations made during the year

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. What would this subsequent event result in?

Adjustment

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. What would this subsequent event result in?

Adjustment

Recipient of management representation letter:

Auditor

What if something comes to the auditor's attention after report?

Auditor should talk to client about putting out new F/S to include concerns; if client refuses, auditor can go to audit committee and SEC

Who prepares the management representation letter?

Auditors

When should the management representation letter be discussed?

Auditors should talk to client early in the audit about the letter and the client's responsibility to sign it

What is the Subsequent Period?

B/S date to Date of Audit Report

Who signs the Management Representation Letter?

CEO & CFO

Who signs the letter of inquiry?

Client

Client lawyer's responsibility with unasserted claims:

Client confidentiality-lawyer cannot disclose confidential information to auditors

Example of Type I event:

Client receiving returns on products in January/February

What should happen if the client doesn't tell auditors about unasserted claims?

Client's lawyer is supposed to consider resigning--not likely

What should an auditor do to have contingencies confirmed?

Contact the client's lawyer with a lawyer letter (letter of inquiry) to try and have client's council confirm the information needed

What 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

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

On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds. What would this subsequent event result in?

Disclosure

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. What would this subsequent event result in?

Disclosure

How are Type II events handled?

Disclosure in F/S

If contingency losses are probable and not reasonably estimated:

Disclosure in F/S

If contingency losses are reasonably possible:

Disclosure in F/S

Type I events

Events that provide additional evidence as to conditions that existed at the date of the B/S and affect the estimates inherent in the process of preparing F/S

Type II events

Events that provide evidence with respect to conditions that did not exist at the date of the balance sheet being reported on but arose subsequent to that date; new issues arising after B/S date

Engagement completion document

Executive summary of workpapers that identifies significant findings or issues, actions taken to address them, and the basis for the conclusions reached in connection with each engagement; Only required for audit of public companies

What is the Interim Period?

F/S period

If contingency losses are probable and reasonably estimated:

F/S should be adjusted

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

Other estimated misstatements

Judgment call; ordinarily estimates

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

Known misstatements, projected misstatements, and other misstatements

What date is used for the management representation letter?

Last date of fieldwork/date of audit report

What is the Date of Audit Report?

Last day of fieldwork

What is the Report Preparation Period?

Last day of fieldwork up until report release date

What are contingencies?

Lawsuits

Asserted claims

Lawsuits that have been filed; public information

Unasserted claims

Lawsuits that probably will happen, but claims have not been filed yet; not public info

How much attention gets paid to gains on contingencies?

Little to none

A possible loss, stemming from past events that will be resolved as to existence and amount by some future event, is referred to as a:

Loss contingency

What type of event is the introduction of a new line of products?

Neither

What is the responsibility of the auditor during report preperation period?

No active responsibility to collect information

What is the auditor's responsibility after report?

No responsibility

What type of event is the death of the company treasurer in an airline crash?

Not a supsequent event

If contingency losses are remote:

Nothing

What is one of the last audit procedures performed?

Obtaining the management representation letter

Which of the following procedures is most likely to be included in the final review stage of an audit?

Perform analytical procedures

What if management refuses to sign the management representation letter?

Scope limitation

What happens if client's lawyer refuses to respond to the letter of inquiry?

Scope limitation; auditor should put more pressure on the client to respond

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

Client lawyer's responsibility with asserted claims:

Sort through claims to determine if settled or need to add missing claims; provide information to auditor

Example: -Calendar-year client -Auditors completed fieldwork on Feb 3 -On Feb 12, before issuing report, found out that client lawsuit has been settled on Feb 11 What type of event? What should the auditor insist the client do? How should the report be dated?

Type I; Adjust F/S; Dual date report-Feb 3 and Feb 12

What type of event is the purchase of a business?

Type II

What type of event is the sale of a bond or capital stock issue?

Type II

Aggregated Misstatements

Uncorrected known misstatements, projected misstatements, other estimated misstatements

Examples of Type II event:

Uninsured fire loss, early retirement of bonds, adding new pension plan option

Management letter

Used by auditors to make recommendations based on observations during the audit

Uncorrected known misstatements

You know an entry should be made, and it has not been made because it may be immaterial-can't get client to change it