Ch. 11 + 12 Class Notes Flashcards
Audit completion date
Last date if fieldwork
Last day out at client’s
Litigation is in consolidated statements if?
2) When is it footnoted?
Probable and estimable
Either probable or estimable
What is included in written representation letter? 2
Holds management responsible for financial statements
Management is responsible for internal control
Auditor should update testing of internal control at…
Year end
When should the auditor perform interim testing of internal control?
Around September
4 situations that would cause going concern situation?
1 limited financing
2 negative cashflows
3 loss of key franchise
4 loss of key customer
Who is responsible for making adjustment journal entries?
The client
Who is responsible for making proposed adjustment entries?
Auditor
Audit documentation
Evidence gathered in work papers to support claims
How often does audit documentation review occur?
Reviewed on an ongoing basis
Management letter, is a letter from auditor to the client on how management can…
Improve efficiency and effectiveness of operations
Cycle counts
Client doesn’t count all inventory at year end
They count quarterly
Analytics
Relationships btw/financial data
Essential for planning
Ex. Determining allowance for doubtful accounts is lower than it
should be
When are analytics required?
At beginning and end of audit
Clearing account
Put stuff in and take stuff out without knowing what it’s about
Earnings management: allowance for doubtful accounts
If you lower allowance for doubtful accounts, that decreases
Expenses and raises earnings
If you raise allowance for doubtful accounts that raises expenses
And lowers earnings
Earnings management: Asset useful life
If you extend useful life of asset, you lower depreciation exp.
And increase earnings
When is change in allowance for doubtful accounts estimate justifiable? 2
1 Change in credit policy
2 change in economic conditions
4 examples of accounting estimates?
1 warranties
2 allowance for doubtful accounts
3 litigation
4 useful life
When is attorney letter sent?
Is there a charge involved?
Sent toward end of audit fieldwork
Attorney charges client for letter
What does a company getting a line of credit show?
Sign of health
What expense account is vouched?
Legal expense account
Unasserted claims
Not filed but possible future claim against client
Written representations are signed by…
What date is included?
Management
Includes date of auditors’ report
Going concern issue, when does auditor share this with the client?
When it is found
When are proposed adjusting entries made?
During the audit
Roll over method
Considers only current period ($7,410 p. 475)
Iron curtain method
Considers cumulative periods ($25,410 p. 475)
Where are uncorrected misstatements communicated?
In management letter
Audit documentation review
Audit supervisor checks whether explanations are understandable
Who reviews the senior’s work?
Manager
What 2 common procedures are performed for subsequent events?
1 read minutes
2 review interim financial statements
Subsequent events footnote example
On January 6th, flood causes $1 million in damage,
where $900,000 is reimbursed by insurance company
Dual dating shouldn’t have…
A negative connotation
If report date is changed instead of to dual date…
More work has to be done
And expenses increase
Give 2 examples that would make a bank a major stakeholder in a private company?
1 requires company to have an audit
2 uses company’s inventory as collateral
Communication with those charged with governance, when its it done?
Throughout audit
Audit committee doesn’t have…
Day to day contact with managers
They rely on auditors to fill them in
What does proxy statement show?
Shows compensation of board of directors for being in different committees
What 2 items should be reported at the top of the management letter?
1 reportable conditions
2 significant deficiencies
Auditors should keep management letter on file to see if…
Suggestions are implemented by management next year
What items are included in the engagement letter? 6
1 level of service 2 statements audited 3 fees 4 dates of engagement 5 list of PBCs (prepared by client) 6 caveat of unforeseen circumstances (to terminate engagement)
Acceptance letter
Engagement letter countersigned by client and sent back to auditor
Auditors can try to sell services in…
Management letter
