Audit-Chapter 17 (SB)
The PCAOB requires that the auditor retains all ______.
1. Documents inconsistent with the final conclusion for significant matters 2. Documents that "form the basis of the audit or review"
The auditor assesses the entity's ability to continue as a going concern when?
1. During the planning of the engagement and 2. Near the end of the engagement
What are some procedures that can help an auditor identify contingent liabilities?
1. Reading minutes of meetings of the board of directors, committees of the board, and stockholders 2. Reviewing contracts, loan agreements, leases, and correspondence from gov't agencies 3. Reviewing tax returns, IRS reports, and schedules supporting the entity's income tax liability 4. Confirming or otherwise documenting guarantees and letters of credit obtained from financial institutions or other lending agencies. 5. Inspecting other documents for possible guarantees or other similar arrangements.
The engagement partner generally reviews working papers ______.
1. Related to critical audit areas 2. Prepared by the manager
The auditor reviews the financial statements what?
1. compliance with GAAP 2. proper presentation of accounts 3. inclusion of all necessary disclosures
With respect to the audit of internal control over financial reporting, the auditor communicates in writing to management and the audit committee what?
1. material weaknesses 2. significant deficiencies
Define legal letter
A letter of audit inquiry sent to the entity's attorneys.
With respect to the audit of internal control over financial reporting, the auditor must communicate all significant deficiencies and material weaknesses in writing to who?
Management and the audit committee
Transactions that occur after the balance sheet date but before the issuance of the financial statements are called
Subsequent Events
What is a management letter used for?
To make recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues that the auditor prepares.
The date of the representation letter is generally the date of the ______.
auditor's report
Accounting standards on derivatives and hedging require commitments such as cash-flow hedges to be what?
Disclosed in the footnotes with an adjustment to OCI and recognize a gain or loss with a comparing to the market price.
Final analytical procedures provide a "smell test". How would explain the meaning of the phrase?
Do the financial statement amounts make sense?
Working papers prepared by the audit manager are reviewed by the ______.
Engagement Partner
To ensure all required footnotes have been properly included, most public accounting firms use some type of financial statement___________
Financial Statement Disclosure Checklist
What do you call audit procedures conducted before year-end?
Interim Procedures
The engagement quality reviewer is a(n) ______.
Partner not associated with the details of the engagement
What is a contingent liability?
Potential liabilities that arise from past transactions or events, but their ultimate resolution depends (is contingent) on a future event. -an existent condition or set of circumstances -Uncertain about amount of loss -Ultimate resolution when some future event occurs or fails to occur
What are the categories of contingent liabilities?
Probable-likely to occur and is accrued by a charge to income Reasonably possible-more than remote but less than likely and is disclosed on the footnotes Remote-change of occurring is slight, you do nothing
Regarding responsibility for reporting changes in internal controls that might adversely affect financial reporting between the end of the reporting period and the date of the auditor report, auditors are ______.
always responsible for reporting these types of changes in internal controls
To consider the overall reasonableness of the financial statement amounts, the auditor performs final__________
analytical procedures
Auditing standards require auditors to communicate certain matters to "those charged with governance". For publicly traded companies, this refers to the _____________________in particular.
audit committee in particular but "those charged with governance" also refers to the board of directors
The primary purpose of a legal letter is to ______.
corroborate information provided by management about litigation, claims and assessments
The sufficiency of the audit evidence and the effects of detected misstatements in the financial statements are the primary concerns of the ___________________of audit evidence.
final evaluation
An auditor has read the minutes of board of directors meetings, inquired of legal counsel regarding litigation, read the interim financial statements, and made inquiries of management. The auditor is most likely ______.
performing audit procedures for subsequent events
The representation letter is addressed to ______.
the auditor
What are examples of contingent liabilities?
-pending or threatened litigation -actual or possible claims and assessments -income tax disputes -product warranties or defects -guarantees of obligations to others -agreements to repurchase receivables that have been sold
When facts are encountered that may affect the auditor's previously issued report, the auditor should ______.
1. Auditor should consult with his/her attorney due to legal implications may be involved and actions taken by the auditor may involve confidential entity-auditor communications. 2. Auditor should determine if facts are reliable and whether they existed at the date of the audit report 3. Auditor should discuss the matter with an appropriate level of management and when appropriate, those charged with governance. 4. Auditor should determine whether the financial statements need revision and, if so, inquire how management intends to address the matter.
Management's refusal to provide a representation letter is ordinarily sufficient to cause an auditor to ______.
1. Disclaim an opinion 2. Withdraw from the engagement
At the near of competition of the engagement, what specific additional steps does an auditor take to identify contingent liabilities?
1. Inquiry of and discussion with management regarding the entity's policies and procedures for identifying, evaluating, and accounting for contingent liabilities. 2. Examining documents in the entity's records such as correspondence and invoices from attorney's for pending or threatened lawsuits. 3. Obtaining a legal letter that describes and evaluates any litigation, claims, or assessments. 4. Obtaining a written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed in accordance with FASB ASC Topic 450.
The final evaluation of audit evidence from the financial statement audit is primarily concerned with _______.
1. Sufficiency of the audit evidence 2. Effects of detected misstatements in the financial statements
The date of the auditor's report is ______.
1. The date on which mgmt must have explicitly taken responsibility for the financial statements 2. The date on which all significant audit documentation must have been reviewed and approved. 3. No earlier than the date on which the auditor has obtained sufficient appropriate evidence.
The objectives of communication with the audit committee is to ______.
1. communicate the auditor's responsibilities and establish an understanding of the terms of the audit engagement with the audit committee 2. Obtain information from the audit committee that is relevant to the audit. 3. communicate an overview of the overall audit strategy and timing 4. provide timely observations arising from the audit that are significant to the financial reporting process.
When significant changes are made to the planned audit approach at any point during the audit, the final documentation should indicate ______.
1. original plan 2. modifications to the plans 3. rationale for the change
The engagement quality control reviewer ______.
1. reads the financial statements 2. considers the appropriateness of the audit report 3. evaluates significant judgements made by the engagement team
The intent of communication with the audit committee is to ______.
1. to encourage a healthy, 2-way dialogue about financial reporting matters 2. to ensure that those charged with governance receive adequate information on significant audit-related issues.
Companies often enter into long-term agreements to purchase raw materials or sell products at a fixed price. Such agreements are called?
Commitments Such commitments are known as cash-flow hedges.
True or False The auditor's treatment of subsequent events relating to internal control is similar to the engagement quality review performed at the conclusion of the audit.
False The auditor treats subsequent events related to internal control in a manner similar to those that relate to financial statement account balances - Type I and Type II.
The auditor has a responsibility to evaluate whether there is substantial doubt about an entity's ability to keep doing business or, in other words, whether or not the entity considered to be a(n)
Going Concern In this context, concern means "entity" and going means "going" (likely to be going) which is a good thing.
What is a general counsel?
In-House attorney
The auditor makes recommendations to the entity based on observations during the audit including suggested improvements in organizational structure and efficiency issues by preparing a(n) ______.
Management Letter