Chapter 24

To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor reviews the audit documentation for the

entire audit to determine whether all material classes of transactions, accounts, and disclosures have been adequately tested

CPAs often obtain a separate evaluation of the potential liability from its own legal counsel,

especially highly material ones, rather than relying on management or management's attorneys

Results form final review may indicate that additional audit evidence is necessary

if any unexpected relationship is found due to client misstatement, the auditor should propose an adjustment if the misstatement is material

Evaluation of known contingent liabilities

if auditors conclude that there are contingent liabilities, they must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements

If the auditor concludes that a material inconsistency exists, they should request the client to change the information

if the client refuses, the auditor should include an explanatory paragraph in the audit report or withdraw form the engagement

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 know misstatements, the auditor must consider possible misstatements

Auditing standards require the auditor to communicate

in writing all fraud and illegal acts to the audit committee or equivalent, regardless of materiality

Auditor responsibility to read other information included in annual report pertains only to

information that is not part of the financial statements but is published with them

Auditing standards require the auditor to communicate certain additional

information to those charged with governance

A procedure auditors rely on for evaluating known litigation and other claims and identifying new claims against the client is the

inquire of the client's attorneys

Management letter

intended to inform client personnel of the CPAs recommendations for improving any part of the client's business

The auditor must communicate in writing significant

internal control deficiencies and material weaknesses in the design or operation of internal control to those charged with governance

Auditors of accelerated filers may also identify events related to

internal control over financial reporting that arose subsequent to year-end

Engagement quality review

is required for SEC engagements, including the review of interim financial information and the audit of internal controls. This reviewer often takes an adversarial position to make sure the audit was adequate

The auditor's primary concern relative to presentation and disclosure-related objectives is

completeness

Auditors often use a

completing the audit checklist, which is a reminder of items that may have been overlooked

The first category of the audit tests includes

cutoff and valuation tests done as part of the tests of details of balances

The letter of representation obtained from an audit client should be __________

dated as of the audit report date

One of the auditor's primary concerns related to presentation and disclosure is

determining whether management has disclosed all required information (completeness)

The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation ____________

did not take place until after the balance sheet date

It is common for a partner to do analytical procedures

during the final review of the audit documentation

Auditor's primary objectives in verifying contingent liabilites

- 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

Audit procedures for finding contingencies

- inquire of management about the possibility of unrecorded contingencies - review current and previous years' internal revenue agent reports for income tax settlements -review the minutes of directors' and stockholders' meetings for indications of contingent liabilities

2 types of subsequent events require consideration by management and evaluation by the auditor:

- those that have a direct effect on the financial statements and require adjustments - those that do not have a direct effect on the financial statements but for which disclosure may be required

SOX requires

attorneys serving public companies to report material violations of federal securities laws committed by the company

Perform final analytical procedures

auditing standards require auditors to perform analytical procedures during the completion of the audit

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

Auditing standards suggest 4 categories specific matters that should be included in the management representation letter

1. financial statements 2. completeness of information 3. recognition, measurement, and disclosure 4. subsequent events

4 principal purposes of required communications

1. Communicate auditor responsibilities in the audit of financial statements. 2. Provide an overview of the scope and timing of the audit. 3. Provide those charged with governance with significant findings arising during the audit. 4. Obtain from those charged with governance information relevant to the audit.

There are 3 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 inexperienced personnel 2. make sure that the audit meets the CPA firm's standard of performance 3. counteract the bias that often enters into the auditor's judgment

In dual dating situations, the auditor has 2 equally acceptable options

1. expand all subsequent events tests to the new date 2. restrict the subsequent events review to matters related to the new subsequent event

The 3 purpose of the client letter of representation are:

1. impress upon management its responsibilities for the assertions in the financial statements 2. remind management of potential misstatements or omissions on the financial statements 3. document the responses from management to inquires about various aspects of the audit

There are 2 categories of audit procedures for the subsequent events to review:

1. procedures normally integrated as a part of the verification of year-end account balances 2. procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events

3 conditions are required for a contingent liability to exist

1. there is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition 2. there is a uncertainty about the amount of the future payment or impairment 3. the outcome will be resolved by some future event or events

SOX required additional communications for auditors of public companies.

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.

Obtain management representation letter

auditing standards require the auditor to obtain written representations from management, usually in a letter of representation documenting management's most important oral representations made during the audit

Read other information in the annual report

auditing standards require the auditor to read other information included in the annual report pertaining directly to the financial statements

If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims,

auditors must modify their audit report to reflect the lack of available evidence

Issue the audit report

The auditor should wait to decide the appropriate audit report to issue until all evidence has been accumulated and evaluated, including all steps of completing the audit

The standard inquire to the client's attorney should be prepared on the ______

client's letterhead and signed by a company official

Audit procedures for finding commitments:

The search for unknown commitments is usually performed as part of the tests in each audit are

With which of the following client personnel would it generally not be appropriate to inquire commitments or contingent liabilities?

accounts receivable clerk

Although rare, auditors sometimes learn

after the audited financial statements have been issued that the financial statements are materially misstated

A commitment is best described as an __________

agreement to commit to the firm to a set of fixed conditions in the future

Closely related to contingencies are commitments:

agreements to commit the firm to a set of fixed conditions in the future, regardless of what happens to profits or the economy as a whole

A final assessment of the entity's going-concern status is desirable after

all evidence has been accumulated and proposed audit adjustments have been incorporated into the financial statements

As part of Phase IV of the audit, auditors evaluate evidence they obtained during the first 3 phases of the audit

and perform additional procedures for presentation and disclosure-related objectives

Auditors use analytical procedures, discussions with management, and their knowledge of the client's business to

assess the likelihood of financial failure within one year

At the completion of larger audits,

it is common to have the financial statements and entire set of audit files reviewed by a completely independent reviewer who has not participated in the audit

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 before the audit report was issued

The second category of the audit tests 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

The auditor's responsibility for reviewing subsequent events is normally limited to the

period beginning on the balance sheet date and ending with the date of the auditor's report

Auditors must clearly distinguish their audit and reporting responsibility for the

primary financial statements and for supplementary information

One of the primary approaches in dealing with uncertainties in loss contingencies uses a _______ threshold

probability

Auditing standards require the auditor to _____ other information included in annual reports pertaining directly to the financial statements

read

The auditor should also be aware of the possibility of commitments when

reading minutes, contracts, and correspondence files

The third part of completing the audit is the

review for subsequent events

Before completing the audit, auditors must make a final evaluation of whether the disclosures in the financial statements

satisfy all presentation and disclosure objectives

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

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

When reviewing the summary of misstatements found in the audit ________________

the auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material

While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter list to clients. The primary purpose of this letter is to provide __________

the client with the CPAs recommendations for improving any part of the client's business

If the auditor discovers that the statements are misleading after they have been issued,

the most desirable action is to request that the client issue an immediate revision of the financial statements that includes an explanation of the reason for the revision.

PCAOB auditing standards require the auditor to also obtain

written representation from management regarding internal control over financial reporting