13. Evidence - Key Considerations

Question 1

If management does not take the necessary steps to revise the FS and ensure disclose to stakeholders, what is the auditors next step (according to AU-C 560)?

Answer 1

Notify management and those charged with governance that they will seek to prevent future reliance on the auditor’s report.

Question 2

What is the letter to external legal counsel?

Answer 2

The auditor’s primary means of obtaining corroboration of the information provided about litigation, claims, and assessments by managements.

Question 3

What is the auditor’s first procedure regarding legal counsel?

Answer 3

Inquire about and discuss any potential litigation with management

Question 4

If there any inconsistency or unacceptable responses regarding related party, what would the auditor do?

Answer 4

Consider the reliability of management’s explanations and representations on other significant matters.

Question 5

If legal counsel returns the inquiry stating no significant disagreements, but then resigns shortly after the receipt of this, what could this indicate?

Answer 5

Undisclosed unasserted claims may have arisen.

Question 6

What should management make specific representations about?

Answer 6

(1) acknowledgment of its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud;
(2) knowledge of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others if the fraud could materially affect the financial statements; and
(3) knowledge of allegations of fraud or suspected fraud affecting the entity obtained in communications from employees or others.

Question 7

What does the inquiry letter response from the client’s legal counsel normally include?

Answer 7

1) address the progress of the case, (2) describe the action the company plans to take, (3) evaluate the likelihood of an unfavorable outcome, and (4) estimate (if possible) the range of any potential loss.

Question 8

What should the auditor do if subsequently discovered facts becomes known to the auditor?

Answer 8

(1) determine whether the financial statements need revision, (2) inquire how management intends to address the matter, and (3) determine whether management is willing to issue revised financial statements.

Question 9

If there is substantial doubt about the entity’s going concern, what should the auditor do?

Answer 9

Consider management’s plans to mitigate their adverse effects with an increasing in equity likely to be a mitigating factor.