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ACC456: Exam 3
Terms in this set (59)
What's the primary procedure related to LCA?
Inquiry of clients
(policies and procedures for identifying, evaluating, and accounting for LCA)
(and letter of inquiry to client's lawyers)
What do auditors have to obtain related to LCA procedures (4)?
Description and evaluation of LCA that existed at YE and after
Management representation that the LCA information is complete
Management representation that all unasserted claims that are probable (based on legal advise) of assertion has been communicated
Information concerning guarantees from bank confirmations
What do auditors have to review related to LCA procedures? (3)
Minutes of meetings
Contracts, loan agreements, and correspondence from taxing and governmental agencies
Documentation related to legal services
What should the attorney letter identify?
The company, including subsidiaries, and the date of the audit
What lists should management prepare for the attorney letter? (2)
List that describes and evaluates pending/threatened LCA with respect to which the lawyer has been engaged and to which he has devoted substantive attention
List that describes and evaluates unasserted claims and assessments that management considers to be probable of assertion, and that, if asserted, would have at least a reasonable possibility of an unfavorable outcome, with respect to which the lawyer has been engaged and to which he has devoted substantive attention
What should the lawyer document in the attorney letter if their views differ from those stated by management? (3)
A description of the nature of the matter, the progress of the case to date, and the action the company intends to take
An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss
With respect to a list prepared by management, an identification of the omission of any pending or threatened LCA or a statement that the list of such matters is complete
What should the attorney letter document related to unasserted claims?
A request that the lawyer comment on those matters as to which his/her views concerning the description or evaluation of the matter may differ from those stated by management
What statement should the client make in the attorney letter?
That the client understands that whenever, in the course of performing legal services for the client with respect to a matter recognized to involve an unasserted possible claim/assessment that may call for F/S disclosure, the lawyer has formed a professional conclusion that the client should disclose or consider disclosure concerning such possible claim or assessment, the lawyer, as a matter of professional responsibility to the client, will so advise the client and will consult with the client concerning the question of such disclosure and the applicable requirements
What should the auditors request in the attorney letter? (2)
Request that the lawyer confirm whether the understanding described above is correct
Request that the lawyer specifically identify the nature of and reasons for any limitation on his response
What are the auditors responsibilities related to LCA? (4)
Inquire of client regarding the existence of LCA
Perform various procedures regarding LCA
Initiate request to the client for attorney letter
Mail attorney letter prepared by client
What are the clients responsibilities related to LCA? (3)
Respond to auditors' inquiries regarding LCA
Provide auditors a list, description, and evaluation of LCA
Prepare attorney letter that includes information related to LCA
What is the attorney's responsibility related to LCA?
Respond to auditors regarding client's description of LCA contained in the attorney letter
What are you required to evaluate related to going concern?
Whether evidence obtained during audit raises concern about "the ability of the entity to continue as a going concern, for a reasonable period of time" (1 year from date of audited F/S)
Inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revision of its operations, etc.
What conditions/event are considered related to going concern? (4)
Exist at or occurred prior to audit report date:
What steps should the auditor take if going concerns exist?
Obtain and evaluate management's plans to mitigate the conditions/events
Assess the likelihood of the plan's effective implementation
What should auditors do if going concerns don't remain after hearing management's plans?
No effect on report, but consider need for disclosure in the F/S
What should auditors do if going concerns do remain after hearing management's plans?
Consider adequacy of F/S disclosure, and add explanatory paragraph with title, after opinion paragraph
What would management's plan to address going concern usually involve? (4)
What 2 phrases must be used when discussing going concerns?
What audit procedures may be used to identify going concerns? (6)
Review of subsequent events
Review of compliance with the terms of debt and loan agreements
Reading of minutes of meetings
Inquiry or entity's legal counsel about LCA
Confirmation with RP of the details of arrangements to provide financial support
What should the auditor communicate to the audit committee related to going concerns? (4)
Conditions that in aggregate, indicate that there is substantial doubt
The basis for the auditor's conclusion, including elements identified within management's plans that are significant for alleviating the substantial doubt
If the substantial doubt about the company's ability to continue as a going concern for a reasonable period of time remains, after considering management's plan (communicate effects on F/S, disclosures, and AR)
Management's unwillingness to make or extend its assessment of the company's ability to continue as a going concern when requested by the auditor
When should issuers communicate with individuals charged with governance?
Prior to AR issuance
When should non-issuers communicate with individuals charged with governance?
Prior to AR issuance, but no later than 60 days after
In general, what should auditors communicate to individuals charged with governance? (7)
Auditors' responsibilities under GAAS
Overview of planned scope and timing of audit
Critical accounting policies and procedures
Judgement about quality of accounting policies, estimates, disclosures, and financial reporting
Significant difficulties encountered during audit
Disagreements with management
Representations requested from management
What else should auditors communicate to individuals charged with governance? (8)
Management consultations with other accountants about a matter that poses a concern for the auditor
Significant issues discussed with management
Auditor's understanding of significant unusual transactions
Other findings or issues significant and relevant to those charged with governance
Material, corrected misstatements
Schedule of uncorrected misstatements
The auditor's report
Significant deficiencies and material weaknesses
Management letter (4)
Not required under GAAS
Are prepared as a by-product of procedures performed in audit
Provide recommendations to the client for improving effectiveness and efficiency of operations (value-adding)
Delivered by auditors to client following audit engagement
Events with material F/S impact, which occur subsequent to YE (B/S date), but prior to F/S and audit report issuance
(requires adjustment to F/S and/or disclosures)
What are the two types of subsequent events?
Conditions existing at YE
Conditions arising after YE
Subsequent event with conditions existing at YE (3)
Subsequent event provides additional evidence/information
Affects any related estimates
Adjust F/S for any changes in estimates based on additional evidence
Subsequent event with conditions arising after YE (4)
Should not result in F/S adjustment
Disclose in F/S notes to keep the F/S from being misleading
May require using pro forma financials, usually B/S only (what F/S would look like if even occurred as of YE)
Auditor may include an emphasis paragraph in the audit report to direct attention to the event and its effects
When are procedures related to subsequent events performed?
At or near the date of the auditor's report
What transactions should auditors focus on when performing procedures related to subsequent events?
Transactions occurring after the B/S date:
Examine data to verify proper cutoffs
Examine data to evaluate assets and liabilities as of B/S date
Related to subsequent events, what should auditors inquire of management and those charged with governance about?
Any substantial contingent liabilities/commitments
Any significant change in the capital stock, LT debt, or working capital
Current status of items in the F/S that were based on preliminary data
Any unusual adjustments made between the B/S date and the date of inquiry
Any changes in the company's related parties
Any significant new RPT
Whether the client has entered into any significant unusual transactions
What should auditors read to conduct audit procedures of subsequent events? (2)
Entity's interim F/S; Compare with F/S under audit
Minutes of meetings
What inquiry should be conducted related to subsequent events?
Inquire of legal counsel about LCA
What needs to be obtained related to subsequent events?
Obtain a letter of representations (management representations)
Are auditors required to obtained management representations?
Yes, the letter is addressed to auditors
What is the date of the management representations letter?
Same date as audit report date (audit completion date)
(representations extend to that date)
What are the broad purposes of the management representation letter? (2)
Impress upon management its primary responsibility for the F/S
May establish auditor's defense if issues about inquiries later arise
What do management's representations relate to?
All F/S periods covered by the auditor's report
What are management's representations limited to?
Matters that are materials to the F/S, individually or in aggregate
Who signs the management representations?
CEO and CFO
Who should get a copy of management's representations?
The audit committee
What should the auditor do if management doesn't provide representations?
Qualify/disclaim an opinion/withdraw if not provided
What information related to the F/S should the management representation letter contain? (3)
Management's responsibility for the fair presentation of the F/S
Management's belief that the F/S is fairly presented in conformity with GAAP
Responsibility for ICFR
What should the management representations state with regard to completeness of information provided to auditors? (6)
Communications from regulatory agencies
No unrecorded transactions
No side agreements
What should the management representation letter state with regard to recognition, measurement, and disclosure?
Any uncorrected misstatements are immaterial, responsibility for anti-fraud programs, knowledge of fraud, plans that may affect CV, RTP, guarantees, etc.
What does the evaluation of audit results include? (6)
Results of final/review/overall analytical procedures
Misstatements accumulated during the audit, including, in particular, uncorrected misstatements
The qualitative aspects of the company's accounting policies
Conditions identified during the audit that relate to the assessment of the RMM due to fraud
Presentation of F/S, including disclosures
Sufficiency and appropriateness of the audit evidence obtained
Why do auditors perform review analytical procedures? (4)
Evaluate the sufficiency of evidence gathered about unusual and unexpected transactions/balances previously identified
Identify unusual or unexpected relationships not previously identified
Evaluate the auditor's conclusions about significant accounts and disclosures
Assist in forming an opinion on whether the F/S as a whole are fairly stated
What should the nature and extent of review analytical procedures be?
Similar to what was done during planning
Should perform analytics relating to revenue through YE
What else is necessary when reviewing analytical procedures? (2)
Review misc, other, and clearing accounts
Corroborate management's explanations
How should auditors accumulate and evaluate misstatements?
Should accumulate misstatements identified, excluding those that are clearly trivial or inconsequential, individually or in aggregate
What should auditors propose related to misstatements?
Adjustment of all misstatements identified, especially if close to performance materiality
What else should auditors do regarding accumulating and evaluating misstatements?
Evaluate the effect of PY's uncorrected misstatements and CYs misstatement that relate to prior years
Consider the current period income effects of misstatements
Consider the aggregate effect on the entity's balance sheet
Carry forward any uncorrected misstatements, for consideration in future audits
Communicate all misstatements to the audit committee
What are examples of potential bias in management's judgement about amounts and disclosures? (4)
Selective correction of misstatements
Identification of additional AJEs that offset misstatements noted by the auditor
Bias in the selection/application of accounting principles
Bias in accounting estimates
What are fraud risks the audit needs to be mindful of?
Do the accumulated results and observations affect the fraud risk statement?
Should procedures be modified in response?
Was there adequate communication with team members throughout the audit, about information indicative of fraud risks?
(Audit partners responsibility)
Presentation of F/S (3)
F/S is presented fairly, in all material respects, in conformity with GAAP
Consider the form, arrangement, F/S content, terminology used, amount of detail provided, classification of items in the F/S, and bases of amount
Absence of a required disclosure results in qualified or adverse opinion
What factors should auditors consider when concluding on whether sufficient appropriate audit evidence has been obtain to support the opinion? (4)
Significance of uncorrected misstatements
Results of audit procedures performed including control procedures
Audit risk assessment
Appropriateness of evidence obtained
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