audit final

what should an attorney letter contain?

- A list of pending or threatened litigation, claims, or assessments - A description of each item, including the nature of the case and management responses or intended responses to the case - An evaluation of the likelihood of an unfavorable outcome - An estimate of the range of potential loss

what are the procedures to identify subsequent events?

- Obtain understanding of procedures management performs to identify subsequent events - Inquire of management and those charged with governance - Read minutes of meetings of owners, management, and those charged with governance - Review entity's interim financial statements

what are the two types of subsequent events?

- Provide new information about conditions existing at date of the financial statements - Involve events that arose following the date of the financial statements

Which of the following statements regarding auditor evaluation of the materiality of misstatements are correct? (choose multiple) - The rollover method only considers current-period income effects. - Auditors may evaluate misstatements using either the rollover or iron curtain method. - Adjustments should not be recommended if the financial statements are not materiality misstated. - Adjustments must only be proposed if both methods indicate material misstatement.

- The rollover method only considers current-period income effects. - Auditors may evaluate misstatements using either the rollover or iron curtain method.

When an auditor expresses an adverse opinion, the opinion paragraph should include

A direct reference to a separate paragraph disclosing the basis for the opinion.

Subsequent events are defined as events that occur subsequent to the

Balance sheet date but prior to the auditor's report date.

Which of the following conditions or events is most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Cash flows from operating activities are negative.

A written representation from a client's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

Chief executive officer and the chief financial officer.

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material.

what do you do if subsequently discovered facts are discovered prior to the audit report release date?

EITHER - revise date of auditors' reports to reflect new completion date (extends our responsibility to that date) OR - dual date auditors' reports

what do roll-forward procedures do?

Extend work from interim period to date of the financial statements

what do you do if subsequently discovered facts are discovered after the audit report release date?

If facts would result in revision of auditors' report or F/S and individuals are relying on F/S: -Notify individuals relying on F/S -get client to issue revised F/S which provide disclosure of facts & a we issue a new audit report

In which of the following circumstances would an auditor usually choose between expressing a qualified opinion or disclaiming an opinion?

Inability to obtain sufficient appropriate audit evidence.

After the date of the report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless

Information, which existed at the report date and may affect the report, comes to the auditor's attention.

An auditor released an audit report that was dual-dated for a subsequently discovered fact occurring after the date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was

Limited to the specific event referenced.

The existence of audit risk is recognized by the statement in the auditor's report that the auditor

Obtains reasonable assurance about whether the financial statements are free of material misstatement.

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may

Require disclosure to keep the financial statements from being misleading.

what are analytical procedures?

Study of relationships among financial and non-financial data

An auditor may not express a qualified opinion when

The auditor lacks independence with respect to the audited entity.

A purpose of a management representation letter is to reduce

The possibility of a misunderstanding concerning management's responsibility for the financial statements.

what do you do if there's a subsequent event that provides new information about conditions existing at the date of the financial statements?

adjust financial statements to reflect new information

what are subsequent events?

an event taking place after year end

When auditors assess the risk of material misstatement from pending litigation, they will request the client send a(n) _____________ _____________ to all lawyers who worked for the client during the period under audit.

attorney letter

what does CAM stand for?

critical audit matters

when are roll-forward procedures performed?

following the date of the financial statements

what new for is filed with the PCAOB by the auditor?

form AP - identifies the engagement partner & other firms completing work

what's included in CAM?

highlight issues with the audit & what procedures were performed to address them

what does KAM stand for?

key audit matters

what is an attorney letter?

letters to the attorneys that indicate that the attorney is allowed to disclose any pending, threatened, or actual litigations to the auditor

what are contingent liabilities?

liability that's contingent upon a future event happening or not

what are some common examples of contingent liabilities?

litigations/lawsuits, warranties, tax disputes

ability to continue as a going-concern: if concerns do NOT remain after evaluating management's plans to mitigate

no effect on report of financial statements

For nonpublic entities, the communication of all significant internal control deficiencies must be made to the client in writing ______. (when)

no later than 60 days after the audit report release date

if there's a remote likelihood that a contingent liability happens, what do you do?

nothing

The phrase "except for" is used in ______.

qualified opinions only

if it is probable that a contingent liability happens & you can estimate it, what do you do?

record the liability

what happens if management doesn't provide a written representation?

represents a scope limitation (results in a modified opinion)

what are final analytical procedures?

required step performed on final audited balances

When omitted procedures are discovered ______.

revised reports may or may not be required

Examining material account transactions that occur between the interim testing date and the date of the financial statements is a common _____________-________ procedure

roll-forward

If relevant internal controls are effective, auditors may use ___________ -__________ procedures to move interim conclusions to the year-end date

roll-forward

When auditors use the ______ method to evaluate the materiality of uncorrected mistakes, only current-period income effect(s) are considered.

rollover

A deficiency (or combination of deficiencies) that does not result in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis but is considered important enough to merit attention to those charged with governance is a(n) _______________.

significant deficiency

the auditing standards regarding subsequently discovered facts refers to knowledge obtained after

the date of the auditor's report

A contingent liability that requires special consideration by auditors is ______.

the outcome of litigation

Assume the same auditors have audited a client for all years for which comparative financial statements are being presented and that an unqualified opinion was appropriate in all years. The auditor will provide a(n) ______ report as part of this audit.

updated

The most recent date of the auditors' report is used and an extension of auditor responsibilities for comparative financial statements occurs when auditors provide ______ reports.

updated

how are type I subsequent events treated?

we adjust the financial statements

when do you issue a qualified opinion?

when there are departures from GAAP or scope limitations (material, but not pervasive)

The auditors' conclusion on condensed financial statements ______ express an opinion.

will not

The auditors' conclusion on not required supplementary information ______ express an opinion

will not

who are written representations from & when are they written?

written by management to auditors on the date of the auditor's report (audit completion date)

these may establish auditors' defense if a question related to inquiries subsequently arises

written representations

what should a written representation contain?

- internal control over financial reporting (for public entities - information related to financial statements

what's the purpose of written representations?

- to impress upon management its primary responsibility for the financial statements

A major purpose of the auditor's report on financial statements is to

Clarify for the public the nature of the auditor's responsibility and performance.

What could indicate substantial doubt about going concern?

Conditions/Ratios -Recurring losses, negative cash flows, low current ratio, high leverage, Other factors - loan default, work stoppage, litigation

Does an auditor make the following representations explicitly or implicitly in the opinion paragraph when expressing an unmodified opinion?

Conformity with theApplicable FinancialReporting Framework: Explicitly Adequacy of Disclosure: Implicity

The primary reason an auditor requests letters of inquiry be sent to a client's legal counsel is to provide the auditor with

Corroboration of the information furnished by management about litigation, claims, and assessments.

The objective of the audit of GAAP-based financial statements is to

Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Extend the due dates of existing loans.

True or false: Auditors are expected to design and perform procedures solely for the purpose of identifying conditions that indicate going-concern uncertainties.

False

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated

March 24, year 2

What are some mitigating factors regarding going concern?

New financing, refinancing (delay or reduce payment), sale of assets or business segment

Written representations are also known as ______ or _______ representations.

client or management representations

The two types of scope limitations are __________ - imposed and ____________ - imposed.

client; circumstance

how do we evaluate the results of the audit?

compile detected known and likely misstatements, propose adjustments, evaluate uncorrected misstatements & materiality

Auditors are required to consider whether evidence obtained during audit raises questions about ability to ______________

continue as a going concern

Which of the following best describes the role of analytical procedures near the end of the audit engagement? a. to identify possible deficiencies in the client's internal control over financial reporting b. to identify accounts that appear to be misstated with the intention of planning the nature, timing, and extent of other substantive procedures c. to gather evidence to support one of more assertion(s) related to the account balance or class of transactions d. to provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement

d. to provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement

The auditor's report on the entity's financial statements covers all events that occur up to the ______.

date of the auditor's report

how are type II subsequent events treated?

disclose it in the footnotes

When subsequently discovered facts are discovered prior to the audit report release, auditors normally choose to ____________ the report.

dual date

How do subsequent events affect the audit report date?

dual date, shift the date to the subsequent event (then responsible for everything up to that date)

Subsequent events provide evidence of conditions that ______.

existed at or arose following the date of the financial statements

what are some modifications we can make and still maintain an unqualified opinion?

explanatory/emphasis of a matter/other matter paragraph: consistency issues, changes in acct principles, going concern issues

A situation in which the design or operation of a control does not allow the entity's management or employees to detect or prevent misstatements in a timely fashion is a(n) ______.

internal control deficiency

When auditors use the ______ method to evaluate the materiality of uncorrected mistakes, the aggregate effect of the misstatements on the entity's balance sheet are considered.

iron curtain

what are the two factors we have to determine with a contingent liability?

likelihood & whether or not the amount can be estimated

With respect to required supplementary information, audit teams are required to perform ______ procedures.

limited

How do auditors become aware of subsequent events?

looking at minutes, interim financial statements, legal letters, inquiry

Auditors should discuss pending litigation with the client's ______.

management & attorneys

Near the end of the audit, recommendations to the client are summarized in a document commonly referred to as the ___________.

management letter

what do we review in accounting estimates?

management's process for developing estimates & estimates for reasonableness

When a company chooses to present non-required supplementary information in the annual report, the company ______ engage auditors to examine and report on the information. - may - may not - must

may

AU-C 705 refers to qualified opinions, adverse opinions, and disclaimers of opinion as _______ opinions.

modified

When annual reports contain MD&A, financial summaries, ratios, or other management commentary, audit teams ______.

must read the information and determine whether it is consistent with audited financial statements or contains material misstatements

when should you obtain an attorney letter response?

near the date of the auditor's reports

how has the PCAOB changed the audit report?

new format, CAM, statement about how long they've been an auditor (tenure disclosure)

How do events after the issuance of financial statements affect the audit report date?

notify those who rely on the financial statements, determine if a restatement is necessary

The situation where auditors failed to perform necessary audit procedures prior to the audit report release date is referred to as ____________ procedures.

omitted

who reviews the work papers during the audit review?

one step above individual completing work, engagement partner, independent partner/quality control

Audits teams may be engaged to examine and report on condensed financial statements ______ audited the full financial statements. - whether or not they have - only if they have not - only if they have

only if they have

For public entities, the communication of all significant internal control deficiencies must be made to the client in writing ______.

prior to the audit report release date

if it's reasonably possible that a contingent liability happens, what do you do?

put a footnote disclosure in the financial statements

The audit team found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?

qualified opinion or adverse opinion

Events occurring between the financial statement date and the date of the auditor's report are referred to as _______ events.

subsequent

Attorney letters should be sent ______. (to whom)

to all attorneys who worked for a client during the period under audit

what are analytical procedures used for at the end of the audit?

to find unusual or unexpected relationships among financial and non-financial data that wasn't found at the planning phase

what's the purpose of management letters?

to provide recommendations to the client for improving effectiveness and efficiency of operations

Audit documentation review ______. (choose multiple) - can be a component of staff training and evaluation - provides an evaluation of the firm's audit practices - ensures the audit is conducted in accordance with GAAP - allows the firm to adhere to the performance principle

- can be a component of staff training and evaluation - provides an evaluation of the firm's audit practices - allows the firm to adhere to the performance principle

Management letters ______. (choose multiple) - can make the client aware of other business services offered - are required by generally accepted auditing standards - are delivered to and discussed with the client

- can make the client aware of other business services offered - are delivered to and discussed with the client

The audit report on the financial statements expresses an opinion on whether the financial statement present, in accordance with GAAP, the entity's ______. (select multiple) - cash flows - internal controls - financial position - results of operations

- cash flows - financial position - results of operations

Auditors are required to ______. (choose multiple) - design and perform procedures for the purpose of identifying conditions that indicate going-concern uncertainties - modify the audit report if any evidence comes to their attention regarding going concern uncertainties - consider evidence that provides substantial doubt about the client's ability to continue as a going concern - obtain information from management regarding plans to mitigate the effects of going concern uncertainties

- consider evidence that provides substantial doubt about the client's ability to continue as a going concern - obtain information from management regarding plans to mitigate the effects of going concern uncertainties

What types of written communication are made during the audit (who are the to/from & what is their purpose)?

- engagement letter: from auditor to client ~ to establish expectations for the audit - representation letter: from management to auditor ~ written responses from what mngmt agreed to verbally - letter to those charged w/ governance: from auditor to audit committee or BOD ~ to report disagreements w/ management, significant deficiencies, misstatements (corrected & uncorrected), & material weaknesses - management letter: from auditor to management ~ suggestions for improvements (optional)

Engagement quality review ______. (choose multiple) - is also known as concurring-partner review - is required by GAAS - must be conducted by the partner in charge of the audit - reviews whether audit evidence was sufficient to support the audit opinion

- is also known as concurring-partner review - is required by GAAS - reviews whether audit evidence was sufficient to support the audit opinion

When component auditors are used in the audit of group financial statements, the group auditors ______. (choose multiple) - may decide to assume full responsibility for the component auditors' work - must consider a division of responsibility to be a scope limitation - must obtain information about the independence and reputation of the component auditors

- may decide to assume full responsibility for the component auditors' work - must obtain information about the independence and reputation of the component auditors

Non-issuers ________. (choose multiple) - do not face any regulatory requirements for filings or audits - may need audited financial statements as a condition for certain activities - are not subject to SEC filing or audit requirements

- may need audited financial statements as a condition for certain activities - are not subject to SEC filing or audit requirements

Issuers ________. (select multiple) - must include footnotes and other required disclosures along with the audited financial statements - are all required to file certain financial information with the SEC within 10 days of their fiscal year end - file their SEC reports using Form 10-K

- must include footnotes and other required disclosures along with the audited financial statements - file their SEC reports using Form 10-K

what happens if a client refuses to issue revised financial statements that provide disclosure of facts?

- notify SEC & others relying on the financial statements - retract our audit opinion

In regards to required supplementary information, audit teams are required to ______. (choose multiple) - obtain written representations from management - perform limited procedures with respect to the information - reference the information and proscribed procedures in the audit report

- obtain written representations from management - perform limited procedures with respect to the information

The basis for opinion section for issues indicates the ______. (choose multiple) - responsibilities of management and the auditors - the audit was conducted in accordance with GAAP standards - audit provides a reasonable basis of the opinion

- responsibilities of management and the auditors - audit provides a reasonable basis of the opinion

When evaluating a change in accounting principle, the audit team ______. (choose multiple) - should be satisfied the method of accounting for the change is appropriate - does not have to agree that the newly adopted principle is preferable to the previous one - should be satisfied disclosures related to the change are appropriate - should be satisfied the new principle is GAAP

- should be satisfied the method of accounting for the change is appropriate - should be satisfied disclosures related to the change are appropriate - should be satisfied the new principle is GAAP

When annual reports contain other information, such as MD&A or financial ratios, and the audit team finds a material inconsistency that the client will not revise, the audit team should consider ______. (choose multiple) - withholding the use of the audit report - issuing an adverse opinion on the financial statements - withdrawing from the engagement - adding an explanatory paragraph to the audit report

- withholding the use of the audit report - withdrawing from the engagement - adding an explanatory paragraph to the audit report

Which of the following statements best describes the distinction between the auditor's responsibilities and management's responsibilities?

The auditor's responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?

The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?

The financial statements fail to disclose information that is required by the applicable reporting framework.

What is difference between Type I and Type II subsequent events (and examples)?

Type I: condition existed at balance sheet date, but became aware afterwards - settlement of a lawsuit - uncollectible account from financial deterioration of customer (not sudden event) Type II: condition arose after the balance sheet date - natural disaster - merger and acquisition activity - segment disposal

which of the following statements is NOT true with respect to written representations? a. the failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion b. they should address management's responsibility for designing internal control to prevent and detect fraud c. auditors use them to corroborate information received during the audit from the client and its employees d. they are dated the same date as the auditor's reports

a. the failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion

When auditors are faced with a scope limitation during an audit, a(n) ______ opinion is not typically issued.

adverse

what are the four types of audit opinions?

adverse, qualified, unqualified, and disclaimer of opinion

What is the time window for "subsequent events"?

after year end - the audit report date

what is a contingent liability?

an existing condition or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when some future eventoccurs or fails to occur.

what procedures identify contingent liabilities or provide reliable evidence?

attorney letters, inquiry of management, meeting minutes, contracts, representation letter

who all is involved in the audit documentation review?

audit supervisor, audit manager & partner, and reviewing partner

When subsequently discovered facts are discovered prior to the audit report release date ______.

auditors generally dual date the audit report

Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? a. recompute a sample of large-dollar transactions occurring after the date of the financial statements for arithmetic accuracy b. investigate changes in shareholders' equity occurring after the date of the financial statements c. send confirmations to vendors with whom the client normally does business, but for which no balance in accounts payable is noted d. confirm bank accounts established after the date of the financial statements

b. investigate changes in shareholders' equity occurring after the date of the financial statements

Written representations are required ______.

before the audit can be completed

When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. the opinion section b. the basis for opinion section c. an emphasis-of-matter paragraph d. an other-matter paragraph

c. an emphasis-of-matter paragraph

which of the following is NOT required by GAAS? a. written representations b. attorney letter c. management letter d. engagement letter

c. management letter

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? a. sale of an issue of new stock for $500,000 on January 30 b. settlement a damage lawsuit for a customer's injury sustained February 15 for $10,000 c. settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements d. storm damage of $1 million to the entity's buildings on March 1

c. settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements

The auditors have gathered sufficient, appropriate evidence on which to base their report at the ______.

date of the auditor's report

when are management letters delivered and by who?

delivered by auditors to client following audit engagement

Situations in which an entity does not follow GAAP in preparing its financial statements are referred to as __________________ GAAP.

departures from

what's the first step in determining materiality?

determination of appropriate benchmarks (pre-tax income is usually the default benchmark)

what's the second step in determining materiality?

determination of planning materiality

When auditors find a departure from GAAP during an audit, a(n) ______ opinion is not typically appropriate.

disclaimer of

ability to continue as a going-concern: if concerns DO remain after evaluating management's plans to mitigate

disclose in financial statements & modify auditors' report

what do you do if there's a subsequent event that arose following the date of the financial statements?

disclose in the financial statements

if it is probable that a contingent liability happens & you can NOT estimate the amount, what do you do?

disclose it in a footnote on the financial statements

When group auditors decide to refer to the work and reports of component auditors, it is referred to as a(n) _______________________.

division of responsibility

When management decides to change an accounting principle and the auditors do not believe the new adopted principle is preferable to the previously used principle, the audit team should ______.

treat the change as a departure from GAAP and modify the report accordingly

T/F: management letters are not required under GAAS

true

T/F: a client can choose not to book an adjusting journal entry and the auditor can still issue an unqualified opinion

true: as long as the adjustments aren't material

The audit team determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following report alternatives?

unmodified opinion with a reference to going-concern or disclaimer of opinion