Completing The Audit

Question 1

Contingent liability

Answer 1

is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place

Question 2

3 conditions of a contingent liability

Answer 2

• potential future payment for an outside party or an impairment of an asset that resulted from an existing condition
• there is uncertainty about the amount of the future payment or impairment
• the outcome will be resolved by some future events

Question 3

If the likelihood of occurrence of the future outcome is probable and can be reasonably estimated …..

Answer 3

Financial statements accounts are adjusted
dr loss/expense
cr liability

Question 4

if the likelihood of occurrence of the future outcome is probable and the amount cant be estimated

Answer 4

note disclosure

Question 5

Contingent Liabilities example

Answer 5

• pending litigation
• income tax disputes
• product warranties
• guarantees of obligations of other parties

Question 6

main objective in verifying CL

Answer 6

• evaluating the accounting treatment of known contingent liabilities
• identifying any CL not already identified by the client

Question 7

to find unidentified contingencies/commitments or evaluate known contingencies/commitments the following procedures can be performed

Answer 7

• inquiry of management
• Reviewing income tax reports
• Reviewing minutes of meeting of shareholders, directors and management
• Reviewing documents
• obtaining letters from attorney

Question 8

Review for subsequent events

Answer 8

a review of transactions and events that occurred after the balance sheet date to determine whether any of the transactions or events affect the fair presentation and disclosures of the current period statements.(extends to the date of auditor’s report and completion of auditing procedures )

Question 9

subsequent events types

Answer 9

1-those that have direct affect on the financial statements and require adjustments. these involve events that were unclear that became clear and an adjustments to the financial statement of previous years is required
2-those dont have direct affect on the financial statements but for which a disclosure is required

Question 10

final analytical procedures

Answer 10

it can be useful as a final review for material misstatement or financial problems. This is usually done by a partner where he considers:

• the adequacy of evidence gathered about unusual or unexpected account balances
• unusual or unexpected balances or relationships that were not previously identified
• the results may indicate the need of extra audit evidence and tests are necessary

Question 11

Evaluate going concern

Answer 11

If a substantial doubt over going concern exists , the auditor should evaluate the management plans to avoid bankruptcy and the feasibility of achieving these plans.

Question 12

obtain management representation letter

Answer 12

letter from client’s management documenting management’s most important oral representation made during the audit (refusal may lead to qualification or disclaimer of opinion) reasons for letter:

• to make management understand the importance of its responsibility of assertions in the financial statements
• to remind management of potential misstatements or omissions in the financial statements
• to document the response of inquiries

Question 13

management representation letter issues

Answer 13

• information concerning fraud
• information about subsequent events
• that financial statements are presented fairly with conformity with accounting standards

Question 14

after the audit is complete the auditor communicates with the audit committee :

Answer 14

-fraud and illegal acts
-internal control deficiencies
-other communication
he does this to :
-communicate his responsibility in the audit
-provide timing and scope for the audit
-give a report to those with governance
-also he write recommendation to the client about the business