Ch. 11 + 12 Class Notes

Question 0

Audit completion date

Answer 0

Last date if fieldwork

Last day out at client’s

Question 1

Litigation is in consolidated statements if?

2) When is it footnoted?

Answer 1

Probable and estimable

Either probable or estimable

Question 2

What is included in written representation letter? 2

Answer 2

Holds management responsible for financial statements

Management is responsible for internal control

Question 3

Auditor should update testing of internal control at…

Answer 3

Year end

Question 4

When should the auditor perform interim testing of internal control?

Answer 4

Around September

Question 5

4 situations that would cause going concern situation?

Answer 5

1 limited financing
2 negative cashflows
3 loss of key franchise
4 loss of key customer

Question 6

Who is responsible for making adjustment journal entries?

Answer 6

The client

Question 7

Who is responsible for making proposed adjustment entries?

Answer 7

Auditor

Question 8

Audit documentation

Answer 8

Evidence gathered in work papers to support claims

Question 9

How often does audit documentation review occur?

Answer 9

Reviewed on an ongoing basis

Question 10

Management letter, is a letter from auditor to the client on how management can…

Answer 10

Improve efficiency and effectiveness of operations

Question 11

Cycle counts

Answer 11

Client doesn’t count all inventory at year end

They count quarterly

Question 12

Analytics

Answer 12

Relationships btw/financial data

Essential for planning

Ex. Determining allowance for doubtful accounts is lower than it
should be

Question 13

When are analytics required?

Answer 13

At beginning and end of audit

Question 14

Clearing account

Answer 14

Put stuff in and take stuff out without knowing what it’s about

Question 15

Earnings management: allowance for doubtful accounts

Answer 15

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

Question 16

Earnings management: Asset useful life

Answer 16

If you extend useful life of asset, you lower depreciation exp.
And increase earnings

Question 17

When is change in allowance for doubtful accounts estimate justifiable? 2

Answer 17

1 Change in credit policy

2 change in economic conditions

Question 18

4 examples of accounting estimates?

Answer 18

1 warranties
2 allowance for doubtful accounts
3 litigation
4 useful life

Question 19

When is attorney letter sent?

Is there a charge involved?

Answer 19

Sent toward end of audit fieldwork

Attorney charges client for letter

Question 20

What does a company getting a line of credit show?

Answer 20

Sign of health

Question 21

What expense account is vouched?

Answer 21

Legal expense account

Question 22

Unasserted claims

Answer 22

Not filed but possible future claim against client

Question 23

Written representations are signed by…

What date is included?

Answer 23

Management

Includes date of auditors’ report

Question 24

Going concern issue, when does auditor share this with the client?

Answer 24

When it is found

Question 25

When are proposed adjusting entries made?

Answer 25

During the audit

Question 26

Roll over method

Answer 26

Considers only current period ($7,410 p. 475)

Question 27

Iron curtain method

Answer 27

Considers cumulative periods ($25,410 p. 475)

Question 28

Where are uncorrected misstatements communicated?

Answer 28

In management letter

Question 29

Audit documentation review

Answer 29

Audit supervisor checks whether explanations are understandable

Question 30

Who reviews the senior’s work?

Answer 30

Manager

Question 31

What 2 common procedures are performed for subsequent events?

Answer 31

1 read minutes

2 review interim financial statements

Question 32

Subsequent events footnote example

Answer 32

On January 6th, flood causes $1 million in damage,

where $900,000 is reimbursed by insurance company

Question 33

Dual dating shouldn’t have…

Answer 33

A negative connotation

Question 34

If report date is changed instead of to dual date…

Answer 34

More work has to be done

And expenses increase

Question 35

Give 2 examples that would make a bank a major stakeholder in a private company?

Answer 35

1 requires company to have an audit

2 uses company’s inventory as collateral

Question 36

Communication with those charged with governance, when its it done?

Answer 36

Throughout audit

Question 37

Audit committee doesn’t have…

Answer 37

Day to day contact with managers

They rely on auditors to fill them in

Question 38

What does proxy statement show?

Answer 38

Shows compensation of board of directors for being in different committees

Question 39

What 2 items should be reported at the top of the management letter?

Answer 39

1 reportable conditions

2 significant deficiencies

Question 40

Auditors should keep management letter on file to see if…

Answer 40

Suggestions are implemented by management next year

Question 41

What items are included in the engagement letter? 6

Answer 41

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)

Question 42

Acceptance letter

Answer 42

Engagement letter countersigned by client and sent back to auditor

Question 43

Auditors can try to sell services in…

Answer 43

Management letter