AUD 4.7 - Matters That Require Special Consideration

Question 1

Where should it be indicated that management has disclosed all contingent liabilities?

Answer 1

Management representation letter

Question 2

Who prepares the letter of inquiry to the client attorneys? Who sends it?

Answer 2

Prepared by management
Sent by the auditors

Question 3

A clients refusal to permit inquiry of the attorneys will results in what option?

Answer 3

Disclaimer of opinion or withdrawl

Question 4

This limitation occurs when attorneys limit their replies to letters of inquiry to matters to which they have given substantial attention

Answer 4

Substantial attention limitation

Question 5

This limitation occurs when attorneys find it might be unwise to disclose certain confidential information or information that might being about a lawsuit:

Answer 5

Confidentiality limitation

Question 6

What type of limitation occurs (and what opinion results) when an attorney refuses to respond to a letter of inquiry where the attorney has devoted substantial attention to litigation matters?

Answer 6

A scope limitation and an unmodified opinion

Question 7

The auditor is responsible for evaluating audit evidence to determine whether there is _____ about the entity’s ability to _____ for a reasonable period of time.

Answer 7

Substantial doubt
Continue as a going concern

Question 8

Under FASB, the auditor is required to evaluate an entity’s ability to continue as a going concern for how long?

Answer 8

One year after the financials are issued

Question 9

Under GASB, the auditor is required to evaluate an entity’s ability to continue as a going concern for how long?

Answer 9

One year after the financial statements date PLUS information that may raise substantial doubt shortly after (such as three months, etc)

Question 10

If there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the auditor should:

Answer 10

Perform audit procedures
Evaluate managements plans to alleviate substantial doubt
Conclude on whether there is substantial doubt and the appropriateness of going concern basis of accounting
Include an emphasis of matter or explanatory paragraph to reflect the conclusion

Question 11

Factors that may indicate substantial doubt include:

Answer 11

Financial difficulties (loan defaults, debt restructuring, etc.)
Internal matters (work stoppages, labor shortages, etc.)
Negative trends (recurrent losses, negative cash flows, etc.)
External matters (legal proceedings, natural disasters, loss of key franchise, etc.)

Question 12

Managements plans for dealing with the conditions or events that led the auditor to believe there is substantial doubt about an entity’s ability to continue as a going concern:

Answer 12

Mitigating factors

Question 13

Mitigating factors include:

Answer 13

Plans to borrow or restructure debt
Plans to sell assets
Plans to delay or reduce expenditures
Plans to increase ownership equity

Question 14

For issuers, what should be added to the auditors report when there is substantial doubt about an entity’s ability to continue as a going concern?

Answer 14

An explanatory paragraph that includes the words “substantial doubt” and “going concern”

Question 15

If the entity’s going concern disclosures are inadequate, a departure from what exists? What opinion would be given?

Answer 15

Departure from GAAP
Qualified or adverse opinion

Question 16

If management is unwilling to perform or stand its evaluation to meet the period of time requirement when requested to do so by the auditor, what opinion should be given?

Answer 16

Qualified or adverse opinion

Question 17

If the auditor determines the going concern basis of accounting is inappropriate to be used by the entity, what opinion should be given?

Answer 17

Adverse opinion

Question 18

If the auditors doubts about the entity’s ability to continue as a going concern are removed in a subsequent period, what should happen?

Answer 18

The explanatory paragraph (issuer) or going concern section (nonissuer) from the prior period audit report should not be repeated

Question 19

The susceptibility of an accounting estimate to an inherent lack of precision in its measurements is:

Answer 19

Estimation uncertainty

Question 20

If the going concern basis of accounting is appropriate and substantial doubt has been eliminated and disclosures are made adequately, what should the auditor do for nonissuers?

Answer 20

The auditor MAY include an emphasis of matters paragraph referencing managements disclosures

Question 21

the going concern basis of accounting is appropriate and substantial doubt remains, what should the auditor do for nonissuers?

Answer 21

The auditor SHOULD include a separate section in the auditors report titled “substantial doubt about the company’s ability to continue as a going concern”