Chapter 13 -- Evidence -- Key Considerations Flashcards
Section 13.1: Consideration of Litigation, Claims, and Assessments
What is usually included in legal counsel’s response to an auditor’s request for information regarding litigation, claims, and assessments?
- A statement regarding the nature and reasons for any limitation on legal counsel’s response should be requested in the letter of inquiry.
- The letter is sent to legal counsel requesting confirmation of the information presented.
Section 13.1: Consideration of Litigation, Claims, and Assessments
When would further investigation need be made by the auditor based on an attorney’s legal letter?
- If the attorney has not provided an opinion as to whether the action will lead to a liability
- For example, further investigation would be required if the attorney stated “…that the company will be able to assert meritorious defenses to this action.”
Section 13.1: Consideration of Litigation, Claims, and Assessments
When would an auditor qualify an opinion for a scope limitation in regard to the legal letter?
- External legal counsel refuses to respond appropriately to the letter of inquiry, and the auditor cannot obtain sufficient appropriate evidence by other means
- Management refuses permission to communicate or meet with counsel
- The attorney’s response specifically excludes information on a pending legal matter because of publicity concerns
Section 13.2: Subsequent Events and Subsequently Discovered Facts
What procedures should an auditor perform in order to obtain evidence about subsequent events?
- Reading the latest subsequent interim statements, if any
- Inquiring of management and those charged with governance about the occurrence of subsequent events and various financial and accounting matters
- Reading the minutes of meetings of owners, management, and those charged with governance
- Obtaining a letter of representations from management
- Inquiring of legal counsel
- Obtaining an understanding of management’s procedures for identifying subsequent events.
Section 13.2: Subsequent Events and Subsequently Discovered Facts
How should a bankruptcy for an accounts receivable account that was discovered as a subsequent event be reported?
- If the account was current in the reporting year, then the bankruptcy would be disclosed and no adjustment needed.
- If the account was reported as aged, or already impaired, then the financial statements are adjusted and a disclosure is made
Section 13.2: Subsequent Events and Subsequently Discovered Facts
What should an auditor do if, after learning of a subsequent event, management does not take the necessary steps to revise the financial statements and ensure that anyone in receipt of the audited financial statements is informed of the situation?
- The auditor should notify management and those charged with governance that the auditor will seek to prevent future reliance on the auditor’s report.
- If, despite such notice, management or those charged with governance do not take the necessary steps, the auditor should take appropriate action to prevent reliance on the auditor’s report
Section 13.3: Written Representations
What should an auditor always do in order to be in accordance with auditing standards?
- Obtain certain written representations from management
- These written representations confirm certain matters or to support other audit evidence
- They do not include financial statements, the assertions in them, or supporting books and records
- They complement other audit procedures but do not provide sufficient appropriate evidence or affect the other procedures (i.e. subsequent events)
Section 13.3: Written Representations
What date should be used on management’s written representation report?
- As of a date no earlier than the date of the auditor’s report
- For all periods referred to in the report.
- If current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management for all such periods
Section 13.3: Written Representations
What should be included in management’s written representation?
- Acknowledgment of its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud
- Knowledge of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others if the fraud could materially affect the financial statements
- Knowledge of allegations of fraud or suspected fraud affecting the entity obtained in communications from employees or others
- Aspects of contracts that may affect the statements, including noncompliance (i.e. contractual agreements)
- All transactions have been recorded in the accounting records
- Discontinuing a line of business
Section 13.3: Written Representations
What should an auditor consider when using management’s representation letter as evidence for an assertion?
- Written representations provide necessary audit evidence that complements other audit procedures.
- Using the written representation by itself does not provide sufficient appropriate evidence about the matters to which they are relevant.
- Obtaining reliable written representations has no effect on the nature and extent of other procedures applied regarding fulfillment of management’s responsibilities or specific assertions.
Section 13.4: Auditor’s Consideration of a Going Concern
What procedures would an auditor perform to identify going concern issues?
- Analytical procedures
- Review of subsequent events
- Review of compliance with debt and loan agreements
- Reading minutes of meetings
- Inquiry of legal counsel
- Confirmation with related and third parties of arrangements for financial support.
Section 13.4: Auditor’s Consideration of a Going Concern
What should an auditor consider regarding going concern issues based on management’s actions?
- Plans to dispose of assets
- Borrow money or restructure debt
- Reduce or delay expenditures
- Increase equity
- Negotiate reductions in required dividends being paid on preferred stock
- An uninsured or underinsured catastrophe
- Internal work stoppages
- Litigation, legislation, or similar matters jeopardizing operating ability
- Loss of a key franchise, license, or patent
- Loss of a principal customer or supplier
