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ACCT 425 > Lec 19 > Flashcards

Lec 19 Flashcards

1
Q

how long does is the going concern asusmption and who is it made by

A

going concern relates to a period of one year of the company continuing to be in operations and is made by management

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2
Q

what is the auditors responsibility in relation to going concern

A

it is their responsibility to gather SAAE about the appropriateness of managements going concern asusmtions and if there is any material issues in this conern

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3
Q

if the going concern is valid, hoes does the i/s and sfp look

A
  • i/s inc and exp are recorded normally
  • sfp - PPE are recorded as cost less accum depr
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4
Q

if the going concern is not valid, how does the i/s and sfp look?

A
  • i/s - no sales revenue and no depreciation
  • sfp - PPE valued at net realizable value
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5
Q

what is net realizable value for ppe in sfp

A

essentially how much ppe can be sold for less the cost needed to prepare it for sale

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6
Q

during what part of the audit do auditors look at events or conditions regarding going concern and is it restricted to this time?

A

they look at it mainly during the risk assessment stage
although, it should be done throughout the entire process

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7
Q

t/f, the auditor shall remain alert throughout the audit for audit evidence of events that may cast significant doubt on the entitys ability to continue as going concern

A

obviously true you donkey look at the complicated wording

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8
Q

what models do auditors use as analytical procedures for risk assessment

A

bankruptcy prediction model

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9
Q

how does the bankruptcy prediction model work?

A

use publicly available data to estimate the probaibility of bankruptcy or classify the firm as fail or non-fail

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10
Q

if events or conditions have been identified that may cast significant doubt on entities ability to continue as a going concern, wha should the auditor do

A
  • obtain SAAE to determine whether or not a material uncertainty exists
  • obtain mitigating factors
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11
Q

what are mitigating factors

A

-LOC availability
- debt extensions
- reduction of dividend payment

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12
Q

what are the 5 procedures done for going concern

A
  • request managment to make assessment of going conern where it has not
  • evalaute the future plans and results of the plans related to mitigation of going concern
  • evalaute prepared cash flow forecasts
  • consider whetehr additional infomariton or facts have become available since teh managment made the assessemnet
  • request written represenatation from mamangement and ask them to specify future plans and feasability of them
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13
Q

is going conecrn assessment relient on manament, why or why not

A

yes, it is because we take their word for the assessment

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14
Q

if mgm assessement of gc is not valid what should auditors do

A

expressd an adverse opinion

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15
Q

is mgm gc is valid but htere is material uncertainty, what is done (2 options)

A
  • adequate disclosure is given in the form of an unmodified opinion and a seperate explaning sention in audit report (apart from emphasis of matter)
  • no adequate discllsure - issue qualified or adverse opinion
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16
Q

if gc is valid and no material uncertainty is present hat should be done

A

an unmodified opnion is isseus

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17
Q

why is it difficult to audit going concern (3)

A
  • the further into the future the gc is made, the more uncertanty there is
  • the size, compexity of the entiy and nature of the business
  • judgement about the future is made only on information available today
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18
Q

what reduces the auditors liability in the auditors report?

A

the absence of amterial uncertainty regarding gc cannot be viewed as a guarantee as to the entity’s ability to continue as a going conern

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19
Q

when are accounting estimates requered

A

required by mgm when monetary amounts cannot be directly observed

20
Q

what is the process in making acoutning estiamtes

A

select and apply a method using assumtions and data by applying judgemnent which makes the estiamtes complex to measure

21
Q

what are 7 examples of accounting estimate

A
  • PPE depreciation
  • vlaution of infrastrcutere
  • valuation of finanacial instriment
  • outcome of pending litigation
  • warranty obligations
  • revenue recognitionn for long-lived contracts
  • inventory obselescenes
22
Q

what are hte 3 most complex accoutning estiamtes

A
  • financial instruments
  • gw impairment
  • pension (actuarial) liabilities
23
Q

what estimation model evaluates gw?

A

business valuation of variables, such as timing of cashflows, growth, discounts

24
Q

what estimation model is used for evaluation pensions

A

actuarial paramenters such as survival rates, attrition rates

25
Q

what estimation model is used for evaluation financial instruments

A

volatilities

26
Q

what is the objective of the auditor in relation to SAAE of accounting estimates

A

obtain SAAE about whether accounting estiamtes and related disclosures in the finacial statments are REASONABLE in the context of the applicable finacial frmaork

27
Q

why is reasonableness defined so loosely and generally

A

because there is struggle with accouting estimates

28
Q

why is assessing accounting estimates inherently dificult? (3)

A
  • inherent difficulty in deveopin the estimate (high uncertainty)
  • lack of technical expertise by management
  • deliberate manamgenet bias
29
Q

the determination of what can go wrong in developing estimates

A

inputs

30
Q

what is the auditors point estimate or auditors range

A

an amount, or range of amounts developed by the auditor to evaluate managements point estimate

31
Q

what is management point estimate

A

amount selected by management for recognition or disclosure in the F/S as an accoutning estimte

32
Q

the outcome of an accounting estimate refers to what

A

the actual monetary amount that results from the resolution of the transaction

33
Q

can all complex accounting estimates be observed?

A

no, some are imposible thus subsequesnt evidence does not work

34
Q

when assessing risk of estimates made and how to proceed, what 2 considerations should be made by the auditor?

A
  • the likelihood that an estimation is subject to estimation uncertainty
  • the degree to which the estimate is affected by complexity, subjectivity, and other inherent risk factors
35
Q

what are the 3 procedures in response to risk of material misstatement

A
  • obtain audit evidence from events occurring up to the date of the auditor’s report
  • test how the management made the accounting estimate
  • develop an auditor’s point estimate
36
Q

developing an auditor’s point estimate creates issues with independence and self review threat, how can this be resolved

A

instated of putting own numbers, will coach management team on how to come up wit the same material number

37
Q

when do auditors decide to design and perform tests for the operating effectiveness of controls (2)

A
  • the assessment of risk of material misstatement at assertion level includes an expectation that the controls are operating effectively
  • substantive procedures alone cannot provide sufficient audit evidence
38
Q

what 2 individuals might controls for accounting estimates be tested by?

A
  • high placed management
  • specialists
39
Q

most likely, audit of complex estimates are pure sub OR combined? and give 3 examples of what might these estimate be

A

most frequently, they are pure substantive
- gw
- actuarial
- financial instruments

40
Q

what are the specialists used for pension liabilities, goodwill impairment, and financial instruments?

A

actuaries, CBVs, CFAs

41
Q

what is the emphasis of matter paragraph?

A

paragraph included in the auditors report that refers to a matter that has been appropriately presented or disclosed in the F/S that the auditor believes is fundamental in understanding the F/S

42
Q

what information does the emphasis of matter paragraph relate to?

A

refers to information presented in the financial statements

43
Q

what are 4 examples of the emphasis of maters that might cause a paragraph to be written

A
  • uncertainty related to the future outcome of exceptional litigation
  • significant subsequent events that occur between the date of the F/S and date of auditors report
  • application of new accoutning policy
  • major catastrophe that has had major consequences on the entity’s financial position
44
Q

what is the other matters paragraph

A

paragraph included that refers to a matter other than those presented in the F/S, that is relevant to user’s understanding

45
Q

what information does the other matters paragraph refer to

A

other information included in the F/S such as MD&A and comparative information from other periods

46
Q

what are 4 examples of other matters paragraph reasons

A
  • the statement is relevant to user’s understanding of audit
  • statement is relevant to user’s understanding of AUDITOR’S responsibities
  • reporting on more than one set of financial statements (may report in diff countries because they are cross listed)
  • there is restricitions imposed on the distribution of the auditors report
47
Q

what report does the statement that the F/S were audited by another auditor who expressed an unmodified opinion in the previous year?

A

the Other Matters Paragraph

ACCT 425 (21 decks)

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