Audit Ch 16

in analyzing payroll, selling and administrative expenses auditors consider these?

controls

if key ratios appear unusually high or low, the auditor will?

perform additional procedures to determine that transactions are not misstated

To assess the financial statement effect of pending litigation, the auditor must?

obtain an attorney letter

In auditing the statement of cash flows, classification & presentation are

particularly important

Because the financial statements must reflect all material subsequent events, the representation letter should be

dated as of the date of the audit report

Misstatements identified by the auditors may be categorized as

factual misstatements, judgmental misstatements, or projected misstatements

auditors routinely analyze certain accounts such as miscellaneous revenue, in which accounting personnel might?

have recorded transactions they did not thoroughly understand

The primary purpose of the representation letter is to?

have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements

Throughout the course of the audit, the auditors accumulate and communicate to management all

identified misstatements other than those the auditors believe to be trivial.

Loss contingencies that do not meet both of the above criteria should still be disclosed?

in a note to the financial statements when there is at least a reasonable possibility that a loss has been incurred

A cash flow statement must be presented for each year for which an

income statement is presented

Type 2 Subsequent Events

involves conditions that arose after the date of the financial statements. These events do not require adjustment to the dollar amounts shown in the financial statements, but they should be disclosed in the financial statement notes if the statements otherwise would be misleading

loss contingency

may be defined as a possible loss, stemming from past events that will be resolved as to existence and amount by some future event

Type 1 subsequent events

provides additional evidence as to conditions that existed at the date of the financial statements. This type of subsequent event requires that the financial statement amounts be adjusted to reflect the changes in estimates re- sulting from the additional evidence

Professional fees expense analysis allows the auditors to determine?

that they have obtained an attorney letter from all attorneys handling litigation for the client

revenue and expense accounts are often substantiated in conjunction with?

the audit of various asset and liability accounts

analyzing an account means?

verifying the individual debit and credit entries in that account

To issue an unmodified opinion, the auditors must

conclude that there is a low level of risk of material misstatement of the financial statements

Auditors must insure that amounts shown in the Cash Flow Statement are consistent with

amounts in the other financial statements

auditors establish the fairness of certain revenues and expenses by performing?

analytical procedures and analyzing specific accounts

analytical procedures applied to I.S. accounts involve comparing revenue and expenses to?

budgeted amounts, to prior year amounts, and to industry average to determine that variations are not caused by material misstatements

Most loss contingencies may also appropriately be called

contingent liabilities. Contingent liability---A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event

Loss contingencies; Such losses should be reflected in the accounting records when both of the following conditions are met:

(1) Information available prior to the issuance of the financial statements indicates that it is probable that a loss has been sustained before the balance sheet date and (2) the amount of the loss can be reasonably estimated

Strong internal control over payroll requires the segregation of

1) hiring 2) timekeeping 3) payroll preparation & recordkeeping 4) distribution.

In completing the audit, auditors must

1. Search for unrecorded liabilities. 2. Review the minutes of meetings. 3. Perform final analytical procedures. 4. Perform procedures to identify loss contingencies. 5. Perform the review for subsequent events. 6. Obtain the representation letter. 7. Communicate misstatements to management. 8. Evaluate audit findings.

Loss contingencies

a broader term, encompassing the possible impairment of assets as well as the possible existence of liabilities

auditors routinely analyze?

certain expense accounts, including miscellaneous expense, travel and entertainment expenses, and charitable contributions