Ch 16 - Completing the Audit

Question 1

T/F: To wrap up the audit, we will do a final read through / inspection of important meeting minutes

Answer 1

True (review during risk assessment portion and completing the audit)

Question 2

3 Important meeting minutes to review:

Answer 2

1) Board meetings

2) Audit Committee meetings

3) Shareholder meetings & calls

Question 3

Why do auditors perform analytical procedures again at the end of an audit?

Answer 3

1) to make sure numbers haven’t changed over the course of the audit

2) to serve as one last reasonableness check (before public release)

Question 4

T/F: Performing Analytical Procedures during the Wrap-Up stage of the audit is optional.

Answer 4

False; it’s REQUIRED

Question 5

A list of statements the Management Team agrees to regarding their conduct during the audit and responsibility for the financial statements

Answer 5

Management Representation Letter

Question 6

T/F: The auditor should provide a copy of the management representation letter to the audit committee if management has not already provided the letter to the audit committee.

Answer 6

True

Question 7

The management representation letter typically includes 3 statements like…

Answer 7

1) Management is ultimately responsible for accuracy of the Financial Statements.

2) Management provided all the information asked for (& didn’t withhold any info)

3) If there are uncorrected misstatements, it’s because Management believes they are immaterial.

Question 8

T/F: If the Management Team is unwilling to sign the Representation Letter, we will withdraw from the engagement.

Answer 8

True; mgt breach of contract

Question 9

T/F: The Management Letter and Management Representation Letter are the same thing.

Answer 9

False; they are DIFFERENT

Question 10

The __________ is an optional letter full of “consulting type” recommendations

Answer 10

Management Letter (some best business practices shared by the auditor)

Question 11

T/F: The auditor charges extra for the Management Letter suggestions.

Answer 11

False; no price addition

Question 12

T/F: If Footnote Disclosures are materially incorrect, this is a Material Misstatement that would change the audit opinion.

Answer 12

True; footnotes are a part of the audit!

Question 13

The management team’s discussion/take on the financial statements, written by the CEO/CFO.

Answer 13

Management Discussion & Analysis (MD&A)

Question 14

What do auditors do in regard to a MD&A?

Answer 14

They REVIEW it; They DO NOT test it

Question 15

The auditor identifies all significant findings or issues for the viewer to understand; PCAOB requirement for public company audits

Answer 15

Engagement Completion Document

Question 16

4 Significant findings:

Answer 16

1) Audit Adjustments (i.e., Adjusting Journal Entries).

2) Disagreements with Management.

3) Matters that could modify the Audit Report. (i.e. material misstatements, going concern issues, emphasis of matter)

4) Significant Deficiencies/Material Weaknesses in Internal Controls.

Question 17

Auditors are required to talk to the audit committee about:

(4 things)

Answer 17

1) Fraud and Illegal Acts
- Material or involving Senior Management is Required
- Other frauds are Optional

2) (Internal) Control Issues (Significant Deficiencies and Material Weaknesses)

3) Significant Findings

4) The Auditor’s responsibilities (providing reasonable assurance…)

Question 18

Events happening in between the fiscal year end and the release of the financial statements

Answer 18

Subsequent Events

Question 19

Subsequent event that relates to conditions that existed on the balance sheet date and require recognition in the financial statements

Answer 19

Type 1 Subsequent Event

(numbers on FS change)

Question 20

2 Examples of Type 1 SEs:

Answer 20

1) settlement (after FYE) of lawsuit (during FY)

2) bankruptcies of the client’s customers (results in write-off)

Question 21

Subsequent event that relates to conditions that did NOT exist on the balance sheet date but would be informative to readers of the financials and require disclosure in the financial statements

Answer 21

Type 2 Subsequent Event

(numbers on FS don’t change, add footnotes)

Question 22

2 Examples of Type 2 SEs:

Answer 22

1) lawsuits that originate after FYE/balance sheet date

2) asset losses from natural disasters after FYE

Question 23

In-between the FYE and the Audit Report Date (i.e., last the of Fieldwork) The auditor must actively search for SEs in between the FYE and the Audit Report Date

Answer 23

Subsequent Period

Question 24

How does the auditor search for SEs during the subsequent period?

Answer 24

1. Inspections – Meeting minutes, general media related to the client and interim financial statements (what the auditor found)
2. Inquiries – Ask the CEO/CFO/Controller if they know of any SEs and what their process is for identifying them (what the executives found)

Question 25

In-between the Audit Report Date and the Report Release Date

Answer 25

Report Preparation Period

Question 26

T/F: The auditor is only responsible for SEs that come to their attention.

Answer 26

True

Question 27

See normal/original date 4/1, 2nd date “except for this SE dated as of 4/22 as seen in financials”

Answer 27

Dual Dating

Question 28

Benefit of dual dating (instead of changing the original date):

Answer 28

No obligation to find SEs within what would've been a farther report date (no additional work), safer, easier

Question 29

Existing conditions or situations with possible future losses that may need to be recognized in the financial statements

Answer 29

Contingent Liabilities

Question 30

The client must recognize a contingent liability/loss if...

Answer 30

The loss is probable (50%+) AND reasonably estimable

Question 31

The client must disclose a contingent liability/loss if...

Answer 31

The loss is probable but not Reasonably Estimable OR if the loss is reasonably possible

Question 32

T/F: The client should always recognize a contingent gain

Answer 32

False; should NEVER recognize

Question 33

The client doesn't have to do anything (aka can ignore) the contingent liability/loss if...

Answer 33

The loss is remote

Question 34

Contingent Liabilities commonly stem from:

Answer 34

1. Fines / Outcomes of ongoing government investigations 2. Recall / Product Warranty issues 3. Lawsuits

Question 35

A confirmation letter related to lawsuits sent to the audit client’s external legal counsel; Primary means of obtaining corroboration of the info furnished by management concerning litigation, claims, and assessments

Answer 35

Letter of Inquiry

Question 36

What's included in the Letter of Inquiry?

Answer 36

1) Known lawsuits 2) Auditor/Clients’ estimate of loss probability 3) Auditor/Clients’ range of potential damages.

Question 37

Lawyers only discuss/respond to __________ (Asserted/Unasserted) Claims

Answer 37

Asserted (aka active/ongoing)

Question 38

T/F: If we are concerned that there are material Contingent Liabilities from unasserted legal claims, we can rely on the Letter of Inquiry to get evidence on them.

Answer 38

False; CAN'T rely on the Letter of Inquiry

Question 39

Workpaper that consolidates all the uncorrected misstatements

Answer 39

Aggregated Misstatements WP

Question 40

Uncorrected misstatements that are inarguable misstatements discovered during our audit testing.

Answer 40

Factual Misstatements

Question 41

Uncorrected misstatement amounts calculated from our Variables Sampling procedures (PPS) but not tied to a specific subaccount/transaction.

Answer 41

Projected Misstatements

Question 42

Uncorrected misstatements that arise from differences in subjective judgements/estimates between the auditor and Management.

Answer 42

Judgmental Misstatements

Question 43

What's an example of a factual misstatement?

Answer 43

Overstatements and understatements

Question 44

T/F: The client must fix material factual misstatements.

Answer 44

True

Question 45

Who decides whether projected and judgmental misstatements are acceptable or not?

Answer 45

Audit partner

Question 46

T/F: Many immaterial misstatements that add up to be material are as equally bad as one single material misstatement.

Answer 46

True

Question 47

The materiality level used at the end of the audit to determine whether uncorrected misstatements will change the audit opinion; has both a Quantitative and Qualitative component

Answer 47

Evaluation Materiality

Question 48

Misstatements can be material even if the $ amount of the misstatement is quite small; these are misstatements that take the client from just under to just over an important target

Answer 48

Qualitative Materiality

Question 49

T/F: If the misstatement is technically not material Quantitatively, but it is getting close, Audit Partners may NOT call it material Qualitatively.

Answer 49

False; may call it material qualitatively

Question 50

There will be a materiality for the financial statements “as a whole” (Overall Materiality). Individual accounts will have a lower Tolerable Misstatement allocated to them.

Answer 50

Quantitative Materiality

Question 51

T/F: Quantitative Materiality calculations are redone in the Wrap-Up phase because often financial statement amounts have changed.

Answer 51

True

Question 52

When is a material misstatement non-current? (2 things)

Answer 52

1) when immaterial misstatements were discovered in prior years and not corrected 2) when misstatements discovered this year that go back into the past

Question 53

What 2 methods do auditors use to determine whether non-current misstatements are material or not?

Answer 53

1) Rollover Method 2) Iron Curtain Method

Question 54

Method that uses only the current year amount to calculate the quantitative portion of Evaluation Materiality

Answer 54

Rollover Method (I/S)

Question 55

For the rollover method, a misstatement is material when...

Answer 55

CY overstatement > TM

Question 56

T/F: If an account is not materially misstated, we still need to make an AJE.

Answer 56

False; only make an AJE if the account is materially misstated

Question 57

if A/R had: Tolerable Misstatement: $100,000 Current Year Overstatement: +$110,000 Prior Year Uncorrected Understatement: -$60,000 What is the AJE?

Answer 57

Dr Bad Debt Expense (or the A4DA) $50,000 Cr A/R $50,000 110k - 60k = 50k

Question 58

Method that uses the cumulative effect of all uncorrected misstatements

Answer 58

Iron Curtain Method (B/S)

Question 59

For the iron curtain method, a misstatement is material when...

Answer 59

PY Overstatement + CY Overstatement > TM

Question 60

if A/R had: Tolerable Misstatement: $100,000 Current Year Overstatement: +$60,000 Prior Year Uncorrected Overstatement: +$60,000 What is the AJE?

Answer 60

Dr Bad Debt Exp 120,000 Cr A/R 120,000

Question 61

T/F: It is possible that a misstatement is material via the Rollover Method and not the Iron Curtain Method, and vice versa.

Answer 61

True

Question 62

T/F: If only 1 of the 2 methods say the misstatement is material, then it's not considered material.

Answer 62

False; it IS considered material (only one method needs to be material)

Question 63

When we propose Adjusting Journal Entries, we correct all prior year misstatements in the _____ (prior/current) year.

Answer 63

Current year

Question 64

T/F: It is possible that correcting the prior year misstatements in the current year produces current year MATERIAL misstatements.

Answer 64

True (typically happens when TM is lower in CY than in PY)

Question 65

T/F: Corrections of non-current misstatements in the current year are treated like a new misstatement in the current year.

Answer 65

True

Question 66

T/F: If the new misstatement would itself be material, we need to actually restate old financial statements.

Answer 66

True