Chapter 16: Completing the Audit Flashcards
(33 cards)
What actions must an auditor take prior to completing an audit?
1) Perform Final Analytical Procedures, 2) Assess the Reasonableness of Accounting Estimates, 3) Summarizing Unrecorded Immaterial Audit Adjustments, 4) Ensure the Adequacy of Disclosures, 5) Evaluate the Going Concern Assumption, 6) Review/Obtain Management Representations, 7) Search for and Evaluate the Adequacy of Accounting for Contingencies, 8) Search for and Evaluate the Adequacy of Accounting for Subsequent Events, 9) Concurring Partner Review, 10) Draft a Management Letter, 11) Communicate with the Audit Committee, 12) Draft and Issue the Audit Report
What is the objective of performing final analytical procedures?
to determine whether audited company’s financial statements make sense given what the auditors know about the company and environment it operates in
Why is a final analytical review necessary?
because when auditors are testing individual accounts they must examine significant amount of detailed information and it is easy to get lost in the detail and lose sight of whether the F/S provide materially accurate reflection of economic reality
When auditor’s are assessing the reasonableness of significant estimates, in what areas is it necessary for auditors to provide reasonable assurance?
1) Management has adequate information system to develop estimates that could be material to F/S, 2) Estimates are reasonable, 3) Estimates are presented in conformity with GAAP
What do auditors need to ensure about unrecorded immaterial audit adjustments?
Make sure the sum of all possible adjustments that were not booked is not material
What happens if unbooked misstatements are material in aggregate?
F/S must be adjusted to correct these mistakes
Why do auditor’s need to make sure that what is reported in the F/S and footnotes is sufficient?
to provide an accurate picture of the economic reality regarding the client’s financial position and performance
What are auditor’s testing when reviewing the disclosures in the footnotes and F/S?
the validity of the disclosure assertions
When is a going concern opinion issued?
when auditors determine that there is doubt that company will survive the next year
What are the two forms of management representation that must be reviewed?
management certification of financial statements and management representation letter
What is the management representation letter?
letter that auditors require management to send to auditors to indicate that management takes responsibility for F/S and that written and oral representations to auditors have been accurate
What date is the management representation letter dated?
the same date as the audit report
What are contingencies?
events that might occur in the future, which could have either a positive or negative effect on the financial position of the company
How do companies account for contingent liabilities?
1) Recognition and disclosure, 2) Disclosure only, 3) Do nothing
What is recognition?
indicates company’s records liability in company’s balance sheet and corresponding expense in IS
What is disclosure?
contingent liability is disclosed in footnotes to F/S, but is not recognized as liability on BS
What determines how a contingent liability is accounted for?
probability of occurrence and whether it can be reasonably estimated
When are contingent liabilities recognized and disclosed?
when probably and reasonably estimatable
When are contingent liabilities just disclosed?
when reasonably possible or cannot be reasonably estimated
When are contingent liabilities not recognized or disclosed?
when they are remote
How do auditors accomplish determining whether a company has accounted for contingent liabilities in accordance with GAAP?
make inquiries of management regarding existence and expected outcomes of contingent liabilities
How do auditors obtain audit evidence to corroborate management’s representations?
Attorney’s Letter, letter of audit inquiry
What date is the Attorney letter dated?
same date as the audit report
What is a subsequent event?
event that takes place after balance sheet date but before the audit report has been filed that requires treatment in the F/S and/or footnotes
