Auditing Final - Chapter 17
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16 terms
Terms | Definitions |
|---|---|
 Review of Contingent Liabilities | Definition - A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur |
| Status of Contingent Liabilities | 1. Probably: The future event is likely to occur 2. Reasonably Possible: The chances of the future event occurring is more than remote but less than probable 3. Remote: The chance of the future event occuring is slight |
| Example of Contingent Liabilities | -Pending or threatened litigation -Actual or possible claims and assessments -Income tax disputes -Product warranties or defects -Guarantees or obligations to others -Agreements to repurchase receivables that have been sold |
| Audit Procedures for Contingent Liabilities | 1. Read minutes of meetings of the board of directors, committees of the board, and stockholders 2. Review income tax liability, tax returns, and IRS agents' reports 3. Confirm or otherwise document guarentees and letters of credit 4. Review contracts, loan agreements, leases, and correspondence from government agencies 5. Inspect other documents for possible guarantees or similar arrangements |
| Specific Audit Procedures Conducted Near Audit Completion | 1. Inquiry and discussion with management about its policies and procedures for identifying, evaluating, and accounting for contingent liabilities. 2. Obtain a legal letter that describes and evaluates any litigation, claims, or assessments 3. Examine documents in the entity's records such as correspondence and invoices from attorneys for pending or threatened lawsuits 4. Obtain written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed in accordance with FASB No. 5 (ASC 450) |
| Legal Letters | A letter of audit inquiry (a legal letter) sent to the client's attorneys is the primary means of obtaining or corroborating information about litigation, claims, and assessments |
| Commitments | -Long-term contracts to purchase raw materials or sell their products at a fixed price 1. To obtain a favorable pricing arrangement 2. To secure the availability of raw materials -Long-term commitments are usually identified through inquiry of client personnel during the audit of the revenue and purchasing processes -In most case, such commitments are disclosed in a footnote to the financial statements |
| Review for Subsequent Events fro Audit of Financial Statements | Type I Event is before B/S Date Type II Event after B/Date |
| Type I Event | Affects estimates that are part of financial statements -Require adjustment of the financial statements |
| Type II Event | Conditions did not exist at the balance sheet date -Require disclosure and possibly pro forma financial statements |
| 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, the auditor considers the following options for dating of the auditor's report: 1) "Dual date" the report (original date of report plus date of subsequent event - limits liability) 2) Change the date of the auditor's report to the date of the subsequent event - extends liability |
| Audit Procedures to Look for Subsequent Events | 1. Inquire of Management 2. Read Minutes of Meetings 3. Inquire of Legal Counsel 4. Examine the Books of Original Entry 5. Read Interim Financial Statements |
| Review of Subsequent Events for Audit of Internal Control over Financial Reporting | -Auditors of public companies are responsible to report on any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report -Internal Audit Reports -Regulatory Agency Reports on ICFR -Independent Auditor Reports of Reportable Condition -Other Information Obtained |
| Final Evidential Evaluation Processes | -Perform final analytical procedures -Evaluate entity's ability to continue as a going concern -Obtain a representation letter -Review working papers -Assess final audit results -Evaluate financial statement presentation and disclosure -Obtain an independent review of the engagement |
| Extra Steps | Estimating likely mistakes Going-concern considerations Communication with those charged with governance |
| Subsequent discovery of Facts Existing at the Date of the Auditor's Report | -Notify the client that the auditor's report must no longer be associated with the f/s -Notify each person known to the auditor to be relying on the f/s -Notify any regulatory agency having jurisdiction over the client that the auditor's report can no longer be relied upon. |
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