Be Audit you can be Flashcards
Using negative AR confirmations requires:
a low risk of MM
a large number of small balances
an expected very low exception rate
no reason to believe that the recipients would not review them properly.
what are negative confirms?
requires a response only if there is a problem with the balance
what is a positive confirm?
requires a response whether the balance is correct or incorrect
FOB shipping point
title passes when the goods are shipped
An auditor should concentrate on key factors and assumptions when evaluating the reasonableness of acct estimates:
Significant to the acct estimate
Sensitive to variations
Deviations from historical patterns
Subjective and susceptible to misstatement and bias
Observable inputs
Assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity
Unobservable inputs
the entity’s own judgments about what assumptions market participants would use.
what is the purpose of a legal letter?
to obtain corroboration of mgmt’s representations to the auditor
What if an attorney refuses to provide info in an inquiry letter?
Scope limitation. It would result in a disclaimer of a qualified opinion.
What do the auditors do regarding legal discussions
discuss with mgmt the policies and procedures it has adopted for evaluating and accounting for litigation, claims, and assessments
contingent liability
potential liability that may occur depending on the outcome of an uncertain future event. should be recorded in the acct records if it is probable and the amount can be reasonably estimated.
Review report on Pro Forma Financial Info
“the historical condensed FSs are derived from the historical unaudited FS, which were reviewed by us, and of ABC co, which were reviewed by other accountants
Letters for underwriters and certain other requestinig parties
“nothing came to our attention as a result of the foregoing procedures, however, that caused us to believe that any Material modifications should be made to the unaudited condensed FS, included in the reg. statement for them to be in conformity with GAAP.
A purpose of a MRL is to
reduce the possibility of a misunderstanding concerning mgmt’s responsibility for the FS
What period of time should an MRL cover?
Should address all periods covered by the auditors report. 2 periods being audited up through the report date
MRL - fraud
Mgmt must acknowledge its responsibility for the design and implementation of programs and controls to prevent and detect fraud
Arm’s length transaction
a transaction conducted on such terms between a willing buyer and seller who are unrelated and are acting independently of each other and pursuing their own best interest
What is the auditors primary responsibility pertaining to related parties?
to ensure that disclosure of related party transactions in the FS is adequate
an auditor would most likely modify an unqualified opinion if the entity’s FS include a footnote on related party transactions…
stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arms length transaction
After issuing a report, an A has no obligation to make cont inquiries or perform other procedures concerning the FS unless
info that existed AT THE REPORT DATE and may affect the report comes to the As attention
What is a type II subsequent event?
pertains to conditions that arose subsequent to the BS date and therefore do not require adjustment of the FSs
The auditors report should not be dated..
earlier than the date on which the auditor has obtained sufficient appropriatae evidence to support an opinion.
When a subsequent event occurs requiring adj of the FS but no disclosure if made,
the report will still be dated when sufficient audit evidence had been obtained ( the original report date)
When the A concludes that there is a going concern issue
the A is required to consider the FS effects including the adequacy of the disclosure of the matters involved.
What are indicators that an entity has sig. financial problems
the denial of usual trade credit from suppliers. Recurring capital losses
Working capital deficiencies
Negative cash flows from operating activities
Adverse key financial ratios
The As consideration relating to mgmt’s plans for dealing with the adverse effects of these conditions most likely would include mgmt plans to
increase ownership equity thru:
Issuance and sale of addit. capital stock