A4/M7 - Matters that require special considerations

Question 1

what factors may an auditor consider indication of substantial doubt?

Answer 1

everything is not FINE

1. Financial difficulties: loan defaults, dividend arrearages, denial of usual trade credit..
2. Internal matter: work stoppages, labor difficulties, substantial dependence on a particular project..
3. Negative trends: recurrent losses, working capital deficiency, negative cash flows, adverse financial ratios
4. External matters: legal proceedings, new legislation, loss of key franchise, license, or patent, natural disasters..

Question 2

how to report of going concern for NONISSUERS and ISSUERS?

Answer 2

NONISSUERS:
- if management plans and carries out the plans to alleviate the substantial doubt, the auditor may (optional) include emphasis-of-matters paragraph

• if substantial doubt remains, the auditor should include a separate section “substantial doubt about the entity’s ability to continue as going concern”

ISSUERS: the auditor could choose to report a nonqualified opinion with a explanatory paragraph or to disclaim an opinion. Make sure to include 2 phrases “going concern” and “substantial doubt”

Question 3

what are common estimates in accounting?

Answer 3

• NRV of inventory and AR
• Compensation in stock option plans
• Future pension and warranty expenses
• Probability of loss and related amounts due to litigation
• FV amounts

Question 4

what are audit procedures to test ligation, claims, and assessments?

Answer 4

• Inquire management about any unrecorded contingencies related to litigation
• Review IRS report and tax returns for unsettled disagreement
• Review minutes of board meetings
• Obtaining a letter from client’s attorney (is required. if not permitted by management, withdraw or disclaim)

Question 5

what are audit procedures to test estimates?

Answer 5

• Must first obtain an understanding of how management developed its estimate, then:
• Review and evaluate methods (if conform with the framework), data (if relevant, reliable), significant assumptions(if assumption is reasonable)
• Develop independent estimate and compare with management’s records
• Evaluate subsequent events and transactions

Question 6

what are the mitigate/alleviate factors/plans by management for dealing with adverse effect of going concern?

Answer 6

in general if the management could generate cash or limit cash outflow to continue operating in the future

• postpose expenditures (including R&D)
• plan to dispose assets
• plan to borrow money or restructure debt
• increase ownership equity (sell stock)

Question 7

what opinion may an auditor issue if an entity is continue as going concern and discloses the information adequately?

Answer 7

Either:
- Unqualified with an explanatory paragraph; or
- Disclaimer