Becker AUD 5.4 - Management Representation Flashcards Preview

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Flashcards in Becker AUD 5.4 - Management Representation Deck (21):
1

ISA vs US Auditing Standards:

ISA requires that the Management representation letter's date to be be near as possible, but not ____ auditor's report date.

US Auditing standards requires that the Management representation letter to be ____ date as the Auditor's report.

(1) After

ISA requires: Management rep to be near as possible to Audit report date (not after audit report date)

US auditing standards: Management rep letter date = same as Auditor report date.

2

If the management rep letter is refused to be given to Auditor (failed to be given to auditor), this results in??


Hint: opinion or leave

Disclaimer of opinion (cannot give an opinion)

or

Withdraw from audit engagement

3

The 3 primary purposes of management rep letter, what are they?

(1) CONFIRM REPRESENTATIONS explicitly or implicitly given to auditor

(2) Indicate and document CONTINUING APPROPRIATENESS of such REPRESENTATION

(3) REDUCE MISUNDERSTANDING concerning matters that are subject of the representations

4

When is the management rep letter received?

At the conclusion of fieldwork.

Before releasing the auditor's report.

5

Management rep letter is mandatory for the auditor to give what kind of opinion?

Management rep letter is mandatory to do what for the auditor's report?

(1) Unmodified opinion

(2) Need Management rep letter before releasing the auditor report.

6

Additional representations can be presented on the Management rep letter or specific reports.

What are these additional representations consist of?

Hint: there are 6 items specific to F/S recognition, measurement, and disclosure

Additional rep from MGT regarding issues specific to Recognition, measurement, and disclosure of items on F/S:

(1) NEW accounting principle
Ex. back then used FIFO, now switch to LIFO
Ex. Adopting a new principle on a current or new account

(2) Impairment of Assets
(MGT judgment based on MGT's data to determine that an asset is impaired by a certain dollar amount)

(3) INTENT to hold DEBT securities to MATURITY

(4) Obsolescence of inventory

(5) Restrictions on Cash

(6) Plans to discontinue a line of business

7

If the management had a hard time to sign the MGT rep letter on auditor's report date, what does the auditor do in this situation?

Auditor accepts MGT's oral confirmation on or before Auditor's report date that MGT has reviewed the final representation letter

and the MGT will sign the rep letter dated (same date as Auditor report date) and give it to the Auditor at a later date.

8

Who signs the management rep letter?

(1) CEO and CFO

or

(2) Other officers and employees may also be asked to sign the letter

9

MGT rep letter provides representation. There are 4 categories of representation.

What are they?

Representations such as:

(1) F/S: Financial Statements
(2) COMPLETENESS of INFORMATION
(3) RMD: Recognition, measurement, and disclosure
(4) Subsequent events

10

Materiality limits are applied to what kind of items?

Materiality limits are not applied to what kind of items?

Materiality limits are applied to items tied to F/S (usually a $$ amount to show up on F/S)

Materiality limits NOT applied to like
* All minutes from meetings
* Fraud involved with management
* Fraud being done by internal control employees

11

Contents of MGT REP letter:

Regarding F/S, MGT rep letter says that the MGT is responsible for?

(1) Preparation and fair presentation of F/S in accordance with Applicable financial reporting framework (i.e. GAAP, IFRS, Special Reporting Framework, Regulatory, etc.)

(2) DESIGN, IMPLEMENTATION, MAINTENANCE of INTERNAL CONTROL relevant to prepare and fair presentation of F/S that are free from material misstatement due to fraud or error.

12

Contents of MGT REP letter:

Regarding completeness of information:

what does the MGT rep letter say about this?

(1) MGT provided the auditor ALL RELEVANT INFO and ACCESS as agreed in engagement

(2) ALL TRANSACTIONS have been RECORDED and are reflected in F/S.

13

Contents of MGT REP letter:

Regarding FRAUD:

what does the MGT rep letter say about this?

(1) MGT is responsible for Design, Implementation, and maintenance internal control to prevent and detect fraud

(2) MGT disclosed to Auditor the results of its (MGT's) assessment of risk that the F/S may be materially misstated as result of fraud.

(3) MGT has disclosed the auditor the MGT's knowledge of FRAUD or SUSPECTED fraud that is involved by:

MGT, Internal control employees (significant roles), and OTHERS when fraud has material effect on F/S

(4) MGT disclosed to auditor MGT's knowledge of any allegations of fraud or suspected fraud affecting entity's F/S communicated by employees, former employees, analysts, regulators, or others.

NOTE: MGT letter not say that MGT is responsible for fixing / resolving fraud. MGT only say what it knows about any evidence of fraud that could be happening.

14

Contents of MGT REP letter:

Regarding LAWS and REGULATIONS:

what does the MGT rep letter say about this?

Disclosed to Auditor that

All instances of IDENTIFIED or SUSPECTED NONCOMPLIANCE with laws and regulations considered by MGT when prepare F/S.

or MGT says it is NOT aware or there is NO identified or suspected NONCOMPLIANCE with laws and regulations.

15

Contents of MGT REP letter:

Regarding UNCORRECTED MISSTATEMENTS:

what does the MGT rep letter say about this?

MGT believes that Uncorrected Misstatements' effects are IMMATERIAL, individually or in aggregate, to F/S as whole.

A list of uncorrected, immaterial misstatements be included in or attached to MGT rep letter.

16

Contents of MGT REP letter:

Regarding Litigations and claims:

what does the MGT rep letter say about this?

Disclose that all known or there is no known actual or possible litigation or claims whose effects considered by MGT preparing F/S

are Disclosed to Auditor
and

These are "Accounted for and disclosed" in accordance with applicable financial reporting framework.

17

Contents of MGT REP letter:

Regarding Estimates:

what does the MGT rep letter say about this?

Whether MGT believes significant assumptions used when making accounting estimates are reasonable

Key works "significant assumptions"
"estimates are reasonable"

18

Contents of MGT REP letter:

Regarding related party transactions:

what does the MGT rep letter say about this?

1) Disclose identity (who is) Related parties and all All related party relationships and which transactions MGT is aware of

2) MGT appropriately "accounted for" and "disclosed" relationships and the transactions.

Key words: Identity related parties, relationships,

"Accounted for and disclosed" such relationships and transactions.

19

Contents of MGT REP letter:

Regarding Subsequent events:

what does the MGT rep letter say about this?

State that there were subsequent events to F/S date and these subsequent events per Applicable financial reporting framework requiring Adjustment or disclosure

are "Adjusted or Disclosed"

Key words: Subsequent events 'adjusted or disclosed"

20

Which of the following:

* Can apply materiality limits on
* Cannot apply materiality limits on

(a) Losses from purchase commitments at prices in excess of market value

(b) Fraud involved with management

(c) Reductions of obsolete inventory to net realizable value

(d) Asset impairment amount

(e) Disclosure of compensating balance arrangements involving related parties

(f) Availability of minutes of stockholders' meetings

(g) Availability of minutes of directors' meetings

(h) Absence of errors and unrecorded transactions in the financial statements

(i) Disclosure of compensating balance arrangements involving restrictions on cash balances

(j) Fraud involving employees with significant roles in the internal control structure

(k) Assumptions used in accounting estimates

(l) Noncompliance with contractual agreement

(m) Unasserted claims and assessments

(n) Losses from sales commitments

(o) information about related party transactions

(p) disclosure of line-of-credit arrangements

(q) VIOLATIONS of state labor regulations

Hint: Materiality limit = test $$ amount (a number)

(a) Can apply materiality limits on

(b) Cannot apply materiality limits on

(c) Can apply materiality limits on

(d) Can apply materiality limits on

(e) Can apply materiality limits on

(f) Cannot apply materiality limits on

(g) Cannot apply materiality limits on

(h) Can apply materiality limits on

(i) Can apply materiality limits on

(j) Cannot apply materiality limits on

(k) Can apply materiality limits on

(l) Can apply materiality limits on

(m) Can apply materiality limits on

(n) Can apply materiality limits on

(o) Can apply materiality limits on

(p) Can apply materiality limits on

(q) Can apply materiality limits on

21

Which of the following:

* Goes on/includes in the management representation letter (written representation)

* Not go on / include in Management representation letter (written representation)

(a) Discloure MGT's knowledge of fraud

(b) Information concerning fraud by CFO

(c) Competency and objectivity of internal audit department

(d) Management has responsibility for design, implementation, and maintenance of internal controls to detect fraud

(e) Management's compensation is contingent upon operating results

(f) MGT communicates its views on ethical behavior to its employees

(g) MGT knowledge of fraud is communicated to audit committee

(h) "No events have occurred subsequent to balance sheet date and would require adjustment to, or disclosure in the financial statements"

(i) "Sufficient audit evidence has been made to auditor to permit the issuance of unqualified opinion"

(j) "There are no unasserted claims or assessments that our lawyers has advised us are probable of assertion and must be disclosed."

(k) "We have no plans or intentions that may materially affect the carrying value or classification of assets or liabilities."

(l) An evaluation of litigation has been filed against entity

(m) Statement that all material internal control weaknesses have been corrected

(n) An assessment of risk factors concerning misappropriation of assets

(o) A statement that effects of all Known and possible litigation and claims have been accounted for and disclosed.

(p) Management's consultation with other accountants

(q) Absence of unrecorded transactions

(r) Uncorrected misstatements identified by auditor and are immaterial

(s) Instances of immaterial fraud involving significant employees in the internal controls

(t) We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege.

(u) There are no significant deficiencies in internal controls identified during the prior-year's audit of which those charged with governance are unaware

(v) No events have occurred subsequent to balance sheet date that required adjustment to, or disclosure in, the F/S.

(a) Go on the MGT rep letter

(b) Go on the MGT rep letter

(c) Not go on MGT rep letter.
This competency and objective of internal audit dept goes on Auditor's paperwork for assessing control risk.

(d) Go on MGT rep letter

(e) Not go on MGT rep letter

(f) Not go on MGT rep letter
MGT rep letter do not care about ethical policies spoken to employees. MGT rep letter not care about employees

(g) Not on MGT rep letter
This because MGT of fraud is communicated to the auditor not to Audit committee.

(h) Go on MGT rep letter

(i) Not on MGT rep letter.
This because it's actually relevant F/S info and access to such info (not audit evidence) for the auditor to

(j) Go on MGT rep letter

(k) Go on MGT rep letter

(l) Not go on MGT rep letter.
This because an evaluation of litigation has been filed against entity is FOUND via an Attorney letter since attorney has more knowledge on this. Not MGT.

(m) Not go on MGT letter
This because Information on internal control weaknesses not go on MGT letter.

MGT letter only say that MGT is responsible for Design, implementation, maintenance of Internal controls to make sure F/S are free of misstatements and Internal controls are effective to detect and prevent fraud.

(n) Not go on MGT letter.
This because an assessment of risk factors concerning misappropriation of assets is something the Auditor records on on their audit work-papers. Not go on MGT letter.

(o) Go on MGT letter.

(p) Not go on MGT letter.

(q) Go on MGT letter
This because absence of unrecorded transactions deals with Completeness of information representation

(r) Go on MGT letter.

(s) Go on MGT letter
This because information on Fraud involving
* MGT
* Significant employees in internal controls
* Others, when their fraudulent actions result in material misstatements on F/S.

(t) Not go on MGT letter.
"We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege."

This statement does not go anywhere on the MGT rep letter.

(u) Not go on MGT letter.
Any information about significant deficiency in internal control in prior year or current year does not go on MGT rep letter.

Internal control info on MGT letter only focuses on MGT responsibility to design, implement, and maintain internal controls

(v) Go on MGT letter