A4 Performing Further Procedures, Forming Conclusions, and Communications

Question 1

What should be included in communication about significant deficiencies and material weaknesses identified during F/S audit?

Answer 1

• (1) include a statement that indicates that the purpose of the audit was for the auditor to express an opinion on the financial statements;
• (2) state that the audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control;
• (3) state that the auditor is not expressing an opinion on the effectiveness of internal control;
• (4) state that the auditor’s consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified;
• (5) include the definition of the term material weakness and, when relevant, the definition of the term significant deficiency;
• (6) include a description of the significant deficiencies and material weaknesses and an explanation of their potential effects; and
• (7) include an appropriate alert that restricts its use. (If an entity is required to furnish the auditor’s written communication to a governmental authority, a specific reference to the governmental authority may be included in the paragraph that restricts its use.)

Question 2

What is the primary reason an auditor requests a letter of inquiry be sent to entity’s legal counsel?

Answer 2

• Corroboration of the information provided by management about litigation, claims, and assessments
• It is management’s job to identify and account for contingent liab.
• It is auditors job to confirm they did it right
• Lawyer corroborates and estimates how much
• If client refuses to allow communication, auditor should disclaim or withdraw

Question 3

What type of issue would not be subject to materiality in the management rep letter?

Answer 3

Fraud involving management.

Due to their nature and implications for the control environment, fraud committed by management should be considered extremely serious, and no materiality limit would apply

Question 4

For an inital audit, what should be done to obtain significant appropriate audit evidence concerning opening balances ?

Answer 4

• Determining whether prior periods closing balances were properly carried forward
• determining whether opening balances relect application of appropriate accounting policies
• evaluating whether audit procedures performed in current period provide evidence relevant to opening balances
• reveiwing predecessor auditors audit documentation
• performing specific audit procedures to obtain evidence regarding the opening balances

Question 5

What is auditor required to communicate to those charged with governance?

Answer 5

• An overview of the planned scope and timing of the audit.
• The auditor’s responsibilities to complete the audit in accordance with Generally Accepted Auditing Standards (GAAS).
• Any significant findings from the audit.

EXAM TRICK: NOT specific details of planned audit procedures - don’t want to make it too predictable. Also, NOT every single contol deficiency, only significant.

Question 6

What representations should be included in the management rep letter?

Answer 6

• Mgmt responsible for F/S:
  
  • accordance with financial reporting framework
  • free from material misstatement due to error or fraud
• Completeness of information
• Any knowledge of fraud has been disclosed
• Design, implementation, maintenance of internal control to prevent and detect fraud
• Noncompliance with laws and regs disclosed to auditor
• Effects of uncorrected misstatements are immaterial
• All known litigation and claims disclosed
• Estimates and assumptions are reasonable
• Related Party transactions disclosed and appropriately accounted for
• Subsequent events adjusted and/or disclosed
• Additional representations as needed

*Additional language around effectiveness of internal control for integrated audit

*This is auditors defense - everything has been covered