S13.2 - Final Audit Steps Ch17 Flashcards
(25 cards)
What is a contingent liability?
An existing condition or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when some future event occurs or fails to occur
When is a contingent liability considered to be probable?
More than 50% chance of happening
When is a contingent liability considered to be reasonably possible?
When there’s a 10 to 50% chance of happening
When is a contingent liability considered to be remote?
less than 10% chance of happening
What are 5 audit procedures for
identifying contingent liabilities
- Read minutes of meetings of the board of directors, committees of the board, and shareholders.
- Review contracts, loan agreements, leases, and correspondence from government agencies.
- Reviewing tax returns, CRA assessments, and schedules supporting the entity’s income tax liability
- Confirm or otherwise document guarantees and letters of credit.
- Inspect other documents for possible guarantees or other similar arrangements.
Audit Procedures for Identifying Contingent Liabilities
What are 4 specific audit procedures conducted near completion of audit
- Inquire and discuss with management about its policies and procedures for identifying, evaluating, and accounting for contingent liabilities.
- Examine documents in the entity’s records such as correspondence and invoices from attorneys for pending or threatened lawsuits.
- Obtain a legal letter that describes and evaluates any litigation, claims, or assessments.
- Obtain a written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed in accordance with FASB ASC Topic 450.
What are commitments?
Long-term contracts to purchase raw materials or sell their products at a fixed price
Why are commitment used? (2)
- To obtain a favorable pricing arrangement
- To secure the availability of raw materials
Review for Subsequent Events of Audit of Financial Statements
What are the 2 types of events?
Type 1: Conditions existed before the balance sheet date and affect estimates that are part of financial statements
Type 2: Conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements
What is event of type 1, and what does it require?
Conditions existed before the balance sheet date and affect estimates that are part of financial statements
Requires adjustment of the financial statements
What is event of type 2, and what does it require?
Conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements
Requires disclosure and possibly pro forma financial statements
What is dual dating?
When a subsequent event is recorded or disclosed in the financial statements after sufficient, appropriate audit evidence has been obtained but before the issuance of the financial statements
GPT: It’s when an auditor puts TWO dates on the audit report.
Why? Because something happened after the balance sheet date, but before the audit report was signed — and the auditor only wants to take responsibility for THAT specific event, not everything else.
What are the 2 options for an auditor when it comes to dating the audit report?
Dual date the report: Original date + date of subsequent event (to limit liability)
Change the date of the report to the date of the subsequent event (extends liability)
What are 5 examples of of audit procedures to look for subsequent events?
- Management inquiry
- Read interim financial statements
- Examine the books of original entry
- Inquiry of legal counsel
- Read the minutes of meetings
In addition to subsequent event review, auditors of U.S. public companies are responsible for what?
(regarding IC)
To report on any changes in internal control that might adversely affect financial reporting between the end of the reporting period and the date of the auditor’s report.
What are the 7 final evidential evaluation processes?
- Perform final analytical procedures
- Obtain a management representation letter
- Review working papers
- Final evaluation of audit reports
- Evaluate F/S disclosure and presentation
- Obtain an independent review of the audit engagement
- Evaluate entity’s ability to continue as a going concern
Final Evidential Evaluation Processes
What is the objective with performing final analytical procedures?
Help assess the conclusions on the F/S components
Evaluate the overall F/S presentation.
Final Evidential Evaluation Processes
What is the objective with obtaining a management representation letter?
Auditing standards require it so that
significant oral representations made to the auditor by management are documented in writing
Final Evidential Evaluation Processes
What does reviewing working papers mean?
All audit work should be reviewed by an audit team member who is senior to the person preparing the working papers.
Final Evidential Evaluation Processes
What are the main 2 concerns addressed with the final evaluation of audit results?
- the sufficiency of the audit evidence
- the effects of detected misstatements in the financial statements
Final Evidential Evaluation Processes
Why do auditors evaluate financial statement presentation and disclosure
Auditor reviews the financial statements to ensure compliance with GAAP, proper presentation of accounts, and inclusion of all necessary disclosures.
Final Evidential Evaluation Processes
Obtain an independent review of the audit engagement are for which companies?
An engagement quality review for publicly traded companies and for privately held companies whose F/S are expected to be widely distributed.
Final Evidential Evaluation Processes
Obtain an independent review of the audit engagement. What is an engagement quality reviewer?
Engagement quality reviewer is a partner who is not associated with the details of the engagement and is expected to provide an independent, objective review
What is the auditor’s responsibility regarding going concern?
The auditor has a responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going-concern for the foreseeable future, usually considered to be one year beyond the date of the financial statements being audited
(from audit report date)
