Audit 4 opening balances
documentation for going concern
-condition/events that give rise -mitigating factors auditor considers significant -audit work performed to evaluate managements plans (written rep from management, description of plans to mitigate FS disclosed all matters relating to going concern. -effects on auditors conclusion on evaluation of FS and related disclosures, and auditors report
auditor responsibility for estimates
-estimate degree of estimation uncertainty -assess mngmnts written policies regarding estimates -verify all material estimates have been developed -determine accounting estimate are reasonable. -ensure estimates are properly presented and disclosed in conformity with GAAP
potential litigation claims and assessments can be discovered by
-inquiry of management of unrecorded contingencies related to litigation -reviewing IRS report and tax returns for unsettled disagreements -reviewing minutes of board and stockholder meeting -letter from client attorney
if there are conditions or events in aggregate that raise substantial doubt the auditor should
-obtain sufficient audit evidence by performing further procedures -evaluate managements plan to alleviate doubt -conclude whether substantial doubt and appropriateness of going concern basis of accounting -include emphasis of matter or explanatory to report conclusion
When auditing opening balances the audit should evaluate whether
-opening balances contain misstatements -policies are applied consistently in current period and any changes in accounting policies
for actual or potential litigation claims and assessments auction should obtain evidence regarding
-period in which occurred -probability of unfavorable outcome -amount or range of potential loss
to obtain sufficient appropriate audit evidence about opening balances auditor should
-read current FS and predecessor auditor report -request management authorize predecessor auditor to allow review of their audit documentation -perform audit procedures on current period transactions to obtain evidence of opening balance or consistency
performing audit procedures on opening balance may include
-tracing cash collections (payments) during period (evidence of AR (payables) opening balances -observing physical inventory counts and reconciling opening balance -considering confirmation with third parties regarding investment and debt
Going concern - Reasonable period of time FASB? GASB
1 yr after date FS were issued 1 yr beyond date of FS (additional three months thereafter)
cash basis and tax basis (going concern not applicable to framework use
1 yr after issued or available to be issued
Auditor ____ there may be a going concern
ADMITS
going concern procedures to determine if there if evidence contrary to going concern include
Analytical procedures Debt compliance (review debt and loan agreements) Minutes Inquiry (legal counsel) Third parties (ability and intent of 3rd parties to provide necessary financial support (written evidence of such intent) Subsequent events (review)
if auditor identifies conditions or events that may be indicative of substantial doubt, everything is NOT
FINE
should the auditor make reference to the predecessor auditors work as the basis for the opinion?
NO Auditor still responsible
for issuer going concern needs to either be
a disclaimer with no going concern paragraph or unqualified with going concern explanatory paragraph
mitigating factors must include both
ability and intent to carry out as planned
If there's going concern how to modify audit report
add emphasis or explanatory paragraph
amounts that are probable but not estimable or reasonably possible are
adequately disclosed
if management uses going concern basis of accounting but in auditors judgment its not appropriate auditor should issue
adverse opinion
date of attorney response should be
as close to auditors report as possible
If auditor believes predecessor audit needs revision due to material misstatements the auditor should
ask client to arrange meeting (both auditors and client) to resolve.
who is responsible for evaluating audit evidence to determine whether entity is a going concern>
auditor
If predecessor auditor changes opinion and it is relevant to current period FS then
auditor should modify opinion on current period FS
mitigating factors for auditors plans to
borrow money or restructure debt' sell assets delay or reduce expenditures increase ownership equity
Going concern is a
departure from GAAP qualified or adverse opinion
who does attorney send reply to
directly to auditor
if do not seek communication with external legal attorney auditor must
document reasoning
attorney response confidentiality limitation
ex. knowledge of patent violation, if disclosures in FS could ring about a lawsuit
factors that may be indicative of substantial doubt
financial difficulties internal matters negative trends external matters
Attorney Substantial attention limitation
lawyers may limit their replies to matters to which they have given substantial attention. Responses may also be limited to material matters if understanding between attorney and auditor
factors that may be indicative of substantial doubt External matters
legal proceedings new legislation, loss of key franchise, license or patent, lost of principal customer or supplier, natural disasters
factors that may be indicative of substantial doubt financial difficulties
loan defaults, dividend arrearages, denial of usual trade credit debt restructuring noncompliance with capital requirements, new financing source or methods, disposal of substantial assets
letter of inquiry to attorney is prepared by? and sent by?
management auditors
regarding litigation management rep letter should disclosue
managements has disclosed independent auditor relevant information regarding litigations
whos responsibility is it to identify and account for contingent liabilities, including litigation claims and assessments
managements through the policies adopted by management
who is primary source of information regarding litigations?
managment
if auditor determines estimate was unreasonable in not in conformity with GAAP, then auditor should treat as
misstatement as the difference between the recorded estimate and best estimates supported by audit evidence If range of reasonable estimate ten difference between recoded estimate and closest reasonable estimate
is attorney primary source of information regarding litigations?
no, letter sent to attorney is simply a means of corroborating evidence provided by managment
if auditors doubts about the going concern are removed in subsequent period, prior period explanatory paragraph
not need to be repeated
predecessor auditor normally permits auditor to review
planning, risk assessment procedures, further audit procedures, audit results and other matters of significance
what amount of litigation should be recorded by management?
probable and reasonably estimable
factors that may be indicative of substantial doubt negative trends
recurrent losses, working capital deficiencies, negative cash flows, adverse financial ratios
determine if estimate with high estimation uncertainty give rise to
significant risks
in evaluating reasonableness of accounting estimates that auditor focuses on assumption that are
significant to the estimate sensitive to variation deviations from historical patters subjective or susceptible to misstatements or managements bias
for going concern uncertainty to emphasis of matter or explanatory paragraph must include
substantial doubt and going concern
Estimation uncertainty
susceptibility of an accounting estimate to an inherent lack of precision in its measurement
auditor should communicate going concern with
those charged with governance
procedures for evaluating reasonabless of estimates inlvolve
understanding how management developed estimate and 1 of the following: -review and test procedures used by management -develop independent estimate -review subsequent events and transactions (occurring prior to date of auditor report) that corroborate value of estimate
attorney response should be
within their knowledge or control and include their professional opinion on expected outcome of any lawsuit and the likely outcome of any liability, including court costs
factors that may be indicative of substantial doubt internal matters
work stoppages, labor difficulties, substantial dependence on a particular project, uneconomic LT commitments, sign revision of operations
