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