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AUD > 12 - III: Audit evidence: Concepts and Standards 2 > Flashcards

12 - III: Audit evidence: Concepts and Standards 2 Flashcards

1
Q

What is the auditor’s objective regarding accounting estimate?

A

to obtain sufficient appropriate audit evidence about whether the accounting estimates (including fair value accounting estimates) are reasonable and whether the related disclosures are adequate in view of the applicable financial reporting framework.

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2
Q

What is accounting estimate?

A

An approximation of a monetary amount in the absence of a precise means of measurement.

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3
Q

What is estimation uncertainty?

A

The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.

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4
Q

Accounting estimate: What understanding must the auditor obtain? (5)

A
  1. Requirements of applicable financial reporting framework.
  2. How management makes the accounting estimates/data on which they are based.
  3. Method/model used.
  4. Whether management used a specialist.
  5. How management assessed estimation uncertainty.
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5
Q

Accounting estimate: What must the auditor do when identifying/assessing the RMM?

A

Evaluate the degree of estimation uncertainty.
Determine whether any estimates result in sig risks - if there are any, the auditor must obtain an understanding of relevant controls and if they mitigates risks.

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6
Q

Estimate: How should the auditor evaluate whether methods used are appropriate and consistent?

A

Do one or more:

  1. Determine whether events up to report date provide evidence.
  2. Test how management made the estimate/data used.
  3. Test operating effectiveness of applicable controls.
  4. Develop a point estimate (or range) to evaluate management’s point estimate.
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7
Q

What should the auditor be aware regarding estimate?

A

Management bias.

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8
Q

Estimate: what must be documented?

A
  1. Basis for the conclusion about the reasonableness of estimate resulting in sig risks.
  2. Indication of management bias.
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9
Q

Estimate: What are key factors about reasonableness?

A

significant to the accounting estimate;
sensitive to variations;
deviations from historical patterns; and
subjective and susceptible to misstatement and bias.

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10
Q

What does Standards refer FV assumption to?

A

Input.

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11
Q

What are 2 inputs?

A

Observable inputs.

Unobservable inputs.

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12
Q

Wha are 5 matters the auditor should consider when evaluating FV assumption model?

A

Whether:

  1. the model is validated prior to usage.
  2. there are control over changes.
  3. the model’s validity is periodically tested (especially when inputs are subjective).
  4. adjustments are made to model’s output.
  5. the model is adequately documented, key parameters/limitations.
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13
Q

What are 4 matters the auditor must consider when evaluating assumptions of FV?

A

Whether the assumption:

  1. appear to be reasonable individually and in the aggregate.
  2. are independent and internally consistent.
  3. reflect observable market conditions.
  4. Existence of sig assumptions may suggest high estimation uncertainty.
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14
Q

What are 4 matters the auditor must consider when considering specialists for FV assumptions?

A
  1. The nature of F/S element involved.
  2. Whether there is high degree of estimation uncertainty.
  3. Whether complex calculations or models are involved.
  4. The procedures the auditor intends to perform in responding to the assessed risks.
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15
Q

FV assumptions: What are 2 keys for doc requirements?

A

Basis for the auditor’s conclusion about reasonableness of estimate, resulting in sig risks.
Indications of possible management bias.

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16
Q

What are procedures to identify the lawyers used?

A

Ask management (primary source).
Inspect relevant invoices (lagel expo).
Review minutes of board meeting.

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17
Q

Why should the auditor involve management to send the letter of inquiry?

A

Management can give authority re: confidentially.

So that management response about the matters can be collaborate into the letter.

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18
Q

What is the lawyer’s response letter called?

A

Lawyer’s letter.

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19
Q

What time frame should the auditor encourage the lawyer to respond?

A

Toward the end of the fieldwork.

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20
Q

What are 2 categories of legal matters?

A
  1. Asserted claims.

2. Unasserted claims and potential litigations.

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21
Q

What are asserted claims? What will the attorney do when omitting the mention of such claims?

A

Pending or threatened litigation.

He will communicate directly.

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22
Q

What is the lawyer’s treatment of omission of unasserted claims?

A

will not disclose to the auditor.

will disclose to management and encourage them to discuss with the auditor.

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23
Q

Why is the omission of unasserted claims issue for the auditor?

A

Because unasserted claims have probable or reasonable possibility of loss that is required disclosure on F/S.

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24
Q

Who is a specialist in auditing? Is the client lawyer a specialist?

A

Those outside with specialized skills/knowledge who is working for the auditor as a team.
No.

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25
Q

Is lawyer objective?

A

No. They are advocates for the client.

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26
Q

What is the objective re: legal matters?

A

to obtain sufficient appropriate audit evidence regarding the completeness of litigation, claims, and assessments involving the entity

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27
Q

What is the auditor’s basic responsibility re: legal matters?

A

To identify litigations, claims, assessments that may cause a risk of material misstatement.

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28
Q

Is obtaining the lawyer’s letter requirement?

A

No, when there is not indication of litigation related issues that cause material misstatement, not required.
Doc above required.

29
Q

What is the implication when the lawyer refuses to response to the letter of inquiry?

A

A limitation on the scope of the audit, resulting in a disclaimer or a qualified opinion..

30
Q

Why must the auditor obtain management representations in writing?

A

To collaborate management responses to the audit inquiries.

31
Q

Who is the management representation addressed to?

Who prepares it? Who sings it? What date is used?

A

Directly to the auditor.
Management.
CEO and CFO.
Same date as the auditor’s report.

32
Q

What is the implication if management refuses to sign the management representation letter?

A

Major scope limitation.

33
Q

If management was not with the company previously, what period should the auditor get the letter signed by them?

A

All the period auditing.

34
Q

What is arms length transactions?

A

Regular transactions with unrelated parties.

35
Q

Related party: What are 3 auditor’s basic responsibilities?

A
  1. To perform audit procedures to identify, assess, and respond to the risks of material misstatement.
  2. To evaluate whether one or more fraud risk factors are present.
  3. To design audit procedures to respond to the assessed risks.
36
Q

Related party: Procedures to identify related parties?

A

Ask management.
Review prior year’s audit doc.
Review SEC filings.
Review stockholder’s listing (those w/ influence).

37
Q

Related party: Procedures to identify transactions?

A

Ask management.
Review minutes of meetings w/ those charged w/ governance.
Inspect doc related to large, unusual transactions (review debt agreements - low interest rate that may suggest related party).

38
Q

Related party: What are other procedures?

A

To understand the business purpose and F/S effects.
View any sig related party transactions, unusual, as sig risks.
Inspect underlying agreements - properly authorized?

39
Q

Related party: Doc/communication requirements?

A

Sig matters.

Should doc the name of identified related parties/nature of relationships and transactions.

40
Q

Related party: What is the auditor’s primary concern?

A

Disclosure.

41
Q

Related party: PCAOB: What are keys in obtaining understanding?

A
  1. Identifying.
  2. Authorizing.
  3. Presenting in F/S.
42
Q

Related party: PCAOB: What must be communicated to audit committee/those charged with governance?

A

Undisclosed related party transactions.
Unauthorized transactions.
Transactions appear to lack appropriate business purpose.
Management assertion that transactions were equivalent to arm’s length.

43
Q

Related party: PCAOB: What are appropriate responses to risk assessment?

A
  1. Read underlying doc for consistency w/ business purpose.
  2. Authorization/approval.
  3. Evaluate financial capability of the related parties.
  4. Other procedures necessary.
44
Q

Related party: PCAOB: What would be the opinion if evidence does not support “equivalent to arm’s length transaction” and management declines to alter the foot notes?

A

Qualified or adverse opinion for a material misstatement.

45
Q

Subsequent events/subsequently discovered facts: Objectives?

A
  1. To obtain sufficient appropriate audit evidence re: whether subsequent events are appropriately reflected in F/S.
  2. To répond appropriately to subsequently discovered facts.
  3. Predecessor auditor requested to reissue the audit report: to determine whether that report is still appropriate.
46
Q

What is subsequent events?

A

Events occurring between F/S date and the auditor’s report date.

47
Q

What is subsequent discovered facts?

A

Facts discovered after the auditor’s report date - if the auditor knew, it may have caused the auditor to revise the report.

48
Q

What are 2 types of subsequent events?

A
  1. Requiring adjustments: Condition already exists before BS date and subsequent event provides better info.
  2. Requiring disclosure: Subsequent event unrelated to condition existed at BS date, but still considered material.
49
Q

What are audit procedures to detect subsequent events? What’s the responsibility?

A
  1. Obtain an understanding of management procedures to identify subsequent events.
  2. Ask management.
  3. Read minutes of those charged w/ governance.
  4. Read interim F/S subsequent to year-end (eyeball accounting record after Y/E).

Obtain sufficient appropriate audit evidence that such events requiring adjustments/disclosures on F/S have been identified.

50
Q

Subsequent discovered facts: what must the auditor do if management does not cooperate or make requested disclosures?

A

Notify those charged with governance.
Notify management, regulators, and any know users no to rely on F/S or audit report.
Consult with legal counsel re: legal reliability.

51
Q

Subsequently discovered facts: Before report release date: Treatment? Audit report date?

A

Discuss w/ management and determine whether F/S requires revision.
If management revises - auditor should perform appropriate procedures to evaluate the revision.
Obtain written management representation up to the additional date.

Date the whole report at the revised date or use dual date for the revision.

52
Q

Subsequently discovered facts: After report release date: Treatment?

A
  • Discuss w/ management and determine whether F/S requires revision.
  • If management revises - auditor should perform appropriate procedures to evaluate the revision.
  • Assess whether management’s actions are timely and appropriate to ensure users don’t rely on erroneous F/S.
  • If opinion differs, should add an emphasis-of-matter (or other matter) paragraph.
53
Q

Subsequently discovered facts: After report date: What should the auditor do if management does not revise F/S?

A

Assess whether management’s actions are timely and appropriate to ensure users are informed.
If management does not take the steps above, the auditor should notify management and those charged w/ governance that the auditor will seek to prevent reliance on the report.
Consult with an attorney, notify regulatory agencies, inform known users.

54
Q

Predecessor’s resistance of report: What procedures should be performed?

A
  1. Read F/S subsequent periods.
  2. Compare the prior F/S to subsequent ones.
  3. Ask management about any info that might affect previous presentation. Obtain a written representation letter from management.
  4. Obtain a representation letter from the successor about known matters affecting F/S audited by predecessor.
55
Q

Predecessor’s resistance of report: What should he do if subsequently discovered fact becomes known?

A
  • Discuss w/ management and determine whether F/S requires revision.
  • If management revises/predecessor intends to issue a new report - auditor should perform appropriate procedures to evaluate the revision.
  • If predecessor doesn’t intend to issue a new report - assess management’s actions to inform users.
56
Q

Is the auditor’s report reissued without F/S reissued?

A

No.

57
Q

Going concern: Objective?

A
  1. Obtain sufficient appropriate audit evidence whether management’s use of going concern basis of accounting is appropriate.
  2. Evaluate whether there is substantial doubt about going concern for a reasonable period of time.
  3. Financial stmt effects (also disclosures).
  4. Report appropriately in accordance w/ SAS.
58
Q

Going concern: What is reasonable time period?

A

The period required by framework or one year after F/S issuance.

59
Q

Does FASB require management evaluate going concern issues within 1 year of F/S?

A

Yes.

60
Q

Going concern: Auditor’s responsibility when management made evaluation and when he didn’t?

A

Yes: Discuss w/ them and obtain understanding of their plans to mitigate the effects.
No: Discuss the intended use of going concern basis of accounting and ask if management has substantial doubt.

61
Q

What’s management responsibility re: going concern and F/S?

A

F/S should be prepared using going concern basis of accounting unless liquidation basis of accounting is appropriate.

62
Q

What are procedures to detect going concern issues?

A

Routine procedures:
substantive analytical procedures, read minutes, obtain lawyer’s letter, review debt agreements for compliance, review subsequent events.

63
Q

What are indicators of going concern issues?

A
  1. Negative trends: recurring losses, negative CF.
  2. Internal matters: labor problems, dependent on single project/customer.
  3. External matters: lawsuits, casualty losses, impending harmful legislation.
  4. Others: already in default, disposing major assets.
64
Q

Going concern: what is the auditor’s basic responsibility when identified substantial doubt? Re: representation letter?

A

Evaluate whether management’s plans would probably mitigate the effects and substantial doubt remain.

Obtain appropriate representation about management plans and adequacy of disclosure.

65
Q

Going concern: what must the auditor do when there is substantial doubt and supporting parties?

A

Obtain written evidence about their intent and ability to provide support.

66
Q

Going concern: communication requirements? (5)

A
  1. Whether condition/events constitute substantial doubt for a reasonable period of time.
  2. Auditor’s consideration of management plan.
  3. Whether use of going concern basis of accounting appropriate (rather than liquidation basis).
  4. Adequacy of F/S disclosures.
  5. Implication on auditors report.
67
Q

Going concern w/ substantial doubt: doc requirements? (5)

A
  1. The condition/event causing the doubt.
  2. Sig elements of management plans.
  3. Procedures performed to evaluate sig elements of plans.
  4. Conclusion that the doubt remains or alleviated.
  5. Conclusion as to the report.
68
Q

Going concern: what is the opinion when F/S disclosure is inadequate? If the use of going concern basis of accounting is inappropriate? If disclosure is adequate and going concern basis of accounting is appropriate?

A

A qualified or adverse opinion.
Adverse opinion.
Add an emphasis-of-matter paragraph (after the unmodified opinion).

69
Q

When substantial doubt is removed, what should be done to an emphasis-of-matter paragraph in the current period?

A

Remove

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