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Audit > Ch 11 > Flashcards

Ch 11 Flashcards

0
Q

Auditors tests of controls determine…

A

1 The operating effectiveness of internal control
2 assess control risk
3 assess risk of material misstatement

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1
Q

Auditors use the audit risk model to…

A

Limit exposure to audit risk

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2
Q

Auditors use substantive procedures to determine…

A

Fairness of account balances and classes of transactions

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3
Q

At the end of an audit, chances of audit failure are…

A

At their highest

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4
Q

5 questions auditor should be asking when audit is concluding

A

1 have year-end misstatements that significantly affect the financial statements been identified?
2 what events that occur after date of financial statements
Could affect current year statements?
3 pending exposure of client to litigation?
4 has client provided all relevant info to auditors during engagement?
5 what matters need to be discussed with individuals charged
With governance of client (audit committee)?

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5
Q

Audit timeline: throughout the year what interim testing should be performed? 2

A

1 test of controls

2 substantive procedures

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6
Q

Audit timeline: 7 items that must be addressed at year end

A 
1 completing substantive procedures 
2 attorneys' letters
3 written representations 
4 going concern assessment
5 adjusting journal entries
6 audit documentation review
7 subsequent events
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7
Q

Audit timeline: what must be looked for before the audit completion date?

A

Subsequently discovered facts

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8
Q

Audit timeline: what 4 items should be looked over before the audit report release date?

A

1 subsequently discovered facts
2 omitted audit procedures
3 management letter
4 communications with those charged with governance

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9
Q

4 important periods on audit timeline

A

1 beginning of the year
2 year end date (date of financial statements)
3 date of auditors report (audit completion date)
4 audit report release date

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10
Q

When does interim testing go through?

A

From January 1st to December 31st

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11
Q

Date of financial statements

A

The year-end date of the latest period covered by the client’s
Financial statements

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12
Q

Date of the auditors report

A

Date where auditors have gathered sufficient appropriate evidence
On which to base their opinions on financial statements and
Internal control over financial reporting

Date that will be used for auditors’ reports on client’s financial
Statements and internal control over financial reporting

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13
Q

Audit report release date

A

Date on which auditors allow client to use their reports in
Conjunction with the financial statements

Same date on which client’s financial statements are issued

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14
Q

Usual period between date of financial statements and date of auditors report?

A

December 31st to February 15th

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15
Q

Challenge for auditors with audit release date

A

Auditors can no longer actively obtain evidence

Dilemma: how to report new development in this short period,
Without increasing responsibility of other (unknown) developments

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16
Q

When issues come to auditors’ attention after audit report release date, what can the auditor due in general?

A

Auditor can take steps to ensure third parties do bit inappropriately
Rely on auditors reports that are no longer reliable

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17
Q

Auditors often test account balances at interim date for…

A

Efficiency reasons

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18
Q

Roll-forward procedures, define, give a common example

A

Procedures performed by auditors to extend that conclusions
From an interim date to the date of financial statements

Ex. Examining material account transactions that occur between
Interim testing date and date of financial statements

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19
Q

What do analytical procedures allow auditors to do?

A

Evaluate financial info by studying relationships among both
financial and nonfinancial data

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20
Q

When must public companies file annual reports with the SEC?

A

Within 60 days after date of financial statements

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21
Q

When can analytical procedures be used throughout he audit according to AU 520? 3

A

1 during planning
2 part of substantive testing
3 near end of audit as overall review

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22
Q

Purpose of Analytical procedures: during planning

A

Assist auditors in planning nature, timing and extent of other audit procedures

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23
Q

Purpose of Analytical procedures: part of substantive testing

A

Obtain audit evidence about particular assertions related to
account balances or classes of transactions

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24
Q

Purpose of Analytical procedures: near end of audit

A

As overall review of financial info

To assess conclusions reached and evaluate the overall financial
Statement presentation

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25
Q

Analytical procedures to review financial statements and footnotes, what do auditors evaluate? 4

A

1 adequacy of evidence gathered in response to unexpected
Account balances
2 relationships among account balances Identified during audit
3 unusual/unexpected acct. balances
4 relationships w/account balances that were not previously
identified In other parts of audit

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26
Q

Key to detecting fraud toward end of audit?

A

If industry averages are tanking, yet the client’s profit ratios
Are increasing warrants gathering additional audit evidence

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27
Q

What should auditors be alert for pertaining to revenue and expense accounts?

A

Alert for “miscellaneous”, “other” or “clearing” classified as
Revenue or expense accounts

Particular when adjustments are made at end of period

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28
Q

How can over reporting of revenue/under reporting of expenses be detected?

A

By scanning accounts for large unusual entries

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29
Q

Earnings management

A

Adjustments to meet analyst expectations

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30
Q

If items pertaining to earnings management are identified, what should the auditor do?

A

Auditors should exam related documents

and inquire with client to verify that classification of revenue
Or expense is appropriate

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31
Q

6 Critical accounting estimates for retailers

A 
1 inventory markdowns 
2 asset impairment
3 sales returns
4 A/R allowance for doubtful accounts 
5 benefits for customer loyalty programs 
6 gift card usage
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32
Q

Because estimates reflect uncertainty and future outcomes, auditors cannot…

2) what should auditors consider about estimates?

A

Audit, corroborate or verify accounting estimates

2) auditors should consider whether estimates are reasonable

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33
Q

What do auditors do relating to management’s estimates near the end of the audit? 2

A

1 evaluate management’s process for developing reasonable
Estimates

2 determine reasonableness of estimates using historical and
Industry data

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34
Q

Contingency, define

Examples

A

Existing condition, situation or circumstances involving uncertainty
Of possible gain or loss to an enterprise

Will be resolved if 1 or more future events occur or fail to occur

Ex. Warranties, tax disputes with IRS, guarantees on debt from
Another party

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35
Q

With respect to contingencies, auditors should ensure… 2 things

A

1 all contingencies are appropriately identified

2 any client disclosure of contingencies reflects most current info
On recent developments both favorable and unfavorable to client

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36
Q

2 important issues from an auditors standpoint relating to pending litigation, claims, assessments

A

1 have been disclosed to auditors

2 are properly presented and disclosed in client’s financial
statements

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37
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

obtain from management a description and evaluation of…

A

Litigation, claims and assessments

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38
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

Examine documents in the client’s possession concerning litigation, claims and assessments including…

A

Correspondence and invoices from client’s attorneys

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39
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

Obtain assurance from management that it has disclosed all material unasserted claims…

A

The attorney has advised them are likely to be litigated

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40
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

Read minutes of meetings of…

A

Stockholder’s, directors and appropriate committees

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41
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

What contracts are read? 3

A

1 loan agreements

2 lease agreements

3 correspondence from taxing or other government agencies

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42
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

Obtain information concerning guarantees from…

A

Bank confirmations

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43
Q

Once an inquiry with management has been made to discuss potential litigation, claims and assessments; procedures auditors perform:

3 things that should be reviewed relating to legal services?

A

1 legal expense account

2 cash disbursements records

3 invoices related to legal services

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44
Q

When auditors assess a risk of material misstatement from pending litigation, claims and assessments, they will request their client send…

A

An attorney letter to all attorneys who worked for the client
During the period under audit

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45
Q

Attorney letter

A

Communication prepared by client but sent by auditors to client’s
Attorneys that details all pending litigation, claims and assessments
Against client

Waives attorney-client privilege so attorneys can comment on
These matters directly to client’s auditors

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46
Q

4 pieces of information the attorney letter should contain (prepared from the client’s perspective)

A

1 list of pending or threatened litigation, claims or assessments
2 description of each item (nature of case, management’s response
Or planned response)
3 evaluation of likelihood of unfavorable outcome
4 estimate of range of potential loss

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47
Q

3 steps of attorney letter correspondence

A

1 letter prepared by client
2 mailed by auditors
3 attorney’s response directly to auditors

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48
Q

4 responsibilities of auditors in audit of litigation, claims and assessments

A

1 inquire of client regarding existence of litigation, etc.
2 perform various procedures regarding litigation, etc.
3 initiate request to client for attorney letter
4 mail attorney letter prepared by client

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49
Q

3 responsibilities of client in audit of litigation, claims and assessments

A

1 respond to auditors’ inquiries regarding litigation, etc.

2 provide auditors list, description and evaluation of litigation, etc.

3 prepare letter to attorney that includes info related to litigation, etc.

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50
Q

responsibility of attorney in audit of litigation, claims and assessments

A

Respond to auditors regarding client’s description of litigation,
Claims and assessments contained in attorney letter

51
Q

What raises additional issues for attorney letters?

A

Unasserted claims

52
Q

Unasserted claim

A

Represents that no formal lawsuit/claim has been filed or
Threatened on behalf of others

But circumstances such as catastrophe, accident or other
Physical occurrence could result in suit/claim filed in future

53
Q

What must attorneys consider in regard to unasserted claims when responding to attorney letters?

A

1 Likelihood that lawsuit/claim will be filed

2 possibility of unfavorable outcome

54
Q

When should attorneys recommend client’s disclose unasserted claims to auditors?

A

When assertion of claim is at least probable

55
Q

Written representations, where must they be included? What must they include?

A

In 10K and 10Q, must include certifications from CEO and CFO
Related to fairness of financial statements

and effectiveness of Internal control

56
Q

AU 580, requires auditor obtain written representations (AKA Management representations AKA client representations) to…

A

Confirm certain matters and support other evidence obtained during the audit

57
Q

Completion of the audit depends on date…

A

Auditors receive written representations from management

Therefore events of written representation run up to date
Audit is completed

58
Q

3 sections of a written representation

A

1 entities financial statements
2 info provided to auditors
3 internal control over financial reporting (for public entities)

59
Q

Written representation: the entities financial statements section, 3 things it includes?

A

1 management’s responsibilities for financial statements and
Internal control over financial reporting
2 appropriate disclosure, presentation and reasonableness
Of items
3 statement that uncorrected misstatements are immaterial to
Financial statements taken as a whole

60
Q

Written representation of financial statements: the appropriate disclosure, presentation and reasonableness of certain items 4 things

A

1 accounting estimates
2 related parties
3 subsequent events
4 litigation and claims

61
Q

Written representation: information provided to auditors, both in general and related sensitive areas, 4 things

A

1 fraud
2 noncompliance with laws and regulations
3 litigation
4 related party transactions

62
Q

Management’s refusal to furnish written representations constitutes a…

2) What does this require?

A

Scope limitation

2) Which requires a qualified opinion on auditors report or disclaimer
Of opinion

63
Q

4 pieces of information that indicates client may have trouble continuing as a going concern

A

1 negative trends
2 financial difficulties
3 internal matters
4 external matters

64
Q

Going concern: negative trends 3

A

1 Recurring operating losses
2 working capital deficiencies
3 negative Cashflow from operations

65
Q

Going concern: financial difficulties 4

A

1 Default on loans
2 denial of credit from suppliers
3 restructuring of Debts
4 arrearages in dividends

66
Q

Going concern: internal matters 2

A

1 work stoppages

2 substantial dependence on success of particular project/activity

67
Q

Going concern: external matters 3

A

1 legal proceedings
2 loss of key franchise, license or patent
3 loss of major customer or supplier

68
Q

Substantial doubt as going concern

A

Auditors required to consider whether any evidence comes to their
Attention of if company can’t continue 1 year beyond date of audit

69
Q

If auditors evaluation suggests going concern uncertainties, auditors should obtain information about…

A

Management’s plans to mitigate the effect of these factors

And assess the likelihood it can be effectively implemented

70
Q

3 ways management may be able mitigate going concern uncertainties

A

1 reduce expenditures
2 restructure existing debt
3 access additional sources of financing

71
Q

In all cases where going concern uncertainties exist, what 3 items will be found on audit documentation?

A

1 conditions or events that suggest going concern uncertainty
2 management’s plans to mitigate going concern uncertainty and
Audit procedures to evaluate management’s plans
3 auditors conclusion to whether substantial doubt exists for
Business to continue

72
Q

Who are the footnotes of financial statements the responsibility of?

A

Management

73
Q

Even when the failure to adjust financial statements would result in materially misstated financial statements, does the client have to accept the auditors’ adjustments?

A

No, it is The client’s decision whether to accept the proposed adjustments

74
Q

What are Adjustments to footnotes suggested by auditors but not yet made by management called?

A

Proposed adjustments

75
Q

Uncorrected misstatement

A

Misstatement that auditors have identified and accumulated during
Audit

Client has not corrected or adjusted misstatement, often because
Of materiality or cost benefit decisions

76
Q

How many uncorrected misstatements occurred before and after SOX?

A

Before 75% stayed uncorrected

After SOX 24.2% stayed uncorrected

77
Q

Staff Accounting Bulletin No. 99: immaterial misstatements

A

Should be adjusted because over the years they may become

material

78
Q

2 methods auditors use to evaluate materiality of uncorrected misstatements

A

1 roll over method

2 iron curtain method

79
Q

Rollover method

A

Process used when evaluating effect of uncorrected misstatements

Considers only the current period income effect of potential
Adjustment

80
Q

Iron curtain method

A

Process used when evaluating the effect of uncorrected
misstatements

Considers aggregate effect of current and prior misstatements
In entity’s balance sheet

81
Q

Staff Accounting Bulletin no. 108, what does it require auditors to do?

A

Evaluate misstatements using both the roll over method and

Iron curtain method

82
Q

Who are auditors required to communicate all misstatements detected during the audit?

A

The client’s audit committee (or other individuals charged with
Governance)

83
Q

3 purposes of audit document review by audit partner and audit manager?

A

1 ensure all steps of audit plan performed
2 referencing among audit documentation is clear
3 audit documentation is understandable

84
Q

Supervisor’s main purpose in audit document review? 2

A

Determine that work was performed with due care

And work can be re performed and verified by another party

85
Q

Common outcome of audit documentation review

A

Review notes prepared by audit supervisor to be completed

By audit staff

86
Q

What do review notes address?

A

Procedures performed referencing audit documentation

And appropriateness of staff member’s conclusions

87
Q

Engagement quality reviewer

A

GAAS requires audit documentation be reviewed by additional
Person

Usually an audit partner who has not been involved with the
Audit

88
Q

What does the review of the engagement quality reviewer focus on?

A

Focuses on significant judgments made by the engagement team

And conclusions reached in preparing auditor’s report

89
Q

4 Benefits of audit documentation review

A

1 ensures audit conducted in accordance with GAAS
2 evaluate quality of firm’s audit practice (method of quality control)
3 important component of training/evaluation of audit staff members
4 adhere to performance principle to adequately plan/supervise
Work

90
Q

Fairness of entity’s financial statements: subsequent events

A

Before auditor report is issued, Auditors should consider impact
of subsequent events on fairness of financial statements

91
Q

Subsequent events

A

Events occurring between the date of financial statements

And date if auditor’s report

92
Q

Auditor’s primary objective with respect to subsequent events

A

Ensure any material events that effect fairness if client’s financial
Statements and disclosures are properly identified

and disclosed in client’s financial statements

93
Q

AU 560 subsequent events: date of financial statements

A

Events that provide additional evidence of conditions that existed
At date of financial statements

Ex. Deteriorating financial condition of client’s customer that had
Large A/R balance

94
Q

AU 560 subsequent events: following date of financial statements

A

Events that provide evidence of conditions that arose following
Date of financial statements

Ex. Major acquisition occurring after date of financial statements

95
Q

AU 560 identifies the following procedures that should performed to identify existence of material subsequent events:

Obtain an understanding of procedures management preformed to…

A

Identify material subsequent events

96
Q

AU 560 identifies the following procedures that should performed to identify existence of material subsequent events:

Inquire of management and those charged with governance as to the existence of…

A

Subsequent events

Inquiry should be corroborated with written representations

97
Q

AU 560 identifies the following procedures that should performed to identify existence of material subsequent events:

Read minutes of meetings of…

A

Owners, management or those charged with governance held after
Date of financial statements

98
Q

AU 560 identifies the following procedures that should performed to identify existence of material subsequent events:

Review entity’s latest…

A

Interim financial statements, if applicable

99
Q

When material subsequent events are identified, auditors are required to…

A

Ensure financial statement disclosure reflects all current information
According to GAAP

100
Q

Subsequently discovered facts

A

Facts know to auditors after the date of audit report

If known before date of audit report, auditor would have revised
Report

101
Q

Subsequently discovered facts before the auditor’s report is issued: change date on auditor’s report to reflect new later date, disadvantage?

A

Auditor’s responsibility for all events is now extended to later date

102
Q

Dual date, define

When is it used?

A

Give 2 dates on auditor’s report

When facts are discovered following date of auditor’s report but
Prior to audit report release date, auditors normally choose to dual
Date the report

103
Q

2 important functions dual dating serves?

A

1 provides way to modify financial statements and disclosures
For info discovered after date of auditor’s report

2 it limits auditor’s liability for events after date of auditor’s report
To events specifically identified in the report date

104
Q

Subsequently discovered facts, do auditors always need to evaluate their effect?

A

No, auditors can choose not too

105
Q

What happens when subsequently discovered facts occur after issuing of the auditors report?, 2 actions client must take

A

1 notify individuals relying on financial statements that they should
not be relied upon and new Statements with auditors reported will
Be issued

2 issue revised financial statements as soon as practicable with
Appropriate disclosure of matter related to subsequently discovered
Fact

106
Q

What happens when subsequently discovered facts occur after issuing of the auditors report and management refuses to take 2 required actions?

A

Auditors should notify management, regulatory agencies or any
Individuals relying on financial statements

That auditor’s report can’t be relied upon

107
Q

If subsequently discovered facts would require revision of financial statements, what should be included in auditors notification (after client has refused to take 2 necessary actions)?

A

Nature of matter and effect on financial statements should be
Included in auditor’s notification

108
Q

Although auditors have no responsibility to continue to review their work after the audit report release date, auditor’s reports and audit documentation may be subjected to…

A

PCAOB inspection, external peer review

or firm’s own internal Inspection program as part of its quality
control

109
Q

What does Section 104 of SOX require?

A

Inspections of audit work to be conducted annually by PCAOB
if firm provides services for over 100 clients

Inspections every 3 years if less than 100 clients

110
Q

Omitted procedures

A

When auditors failed to perform necessary audit procedures

Prior to audit report release date

111
Q

AU 585’s 2 points of guidance about when omitted procedures should be performed

A

1 if omitted procedures are important in supporting auditor’s
Opinion

2 individuals are currently relying on the client’s financial statements
And auditor’s report, assuming omitted procedures are relevant

112
Q

Individuals charged with governance

A

Persons responsible for overseeing client’s financial reporting
process including the internal control of financial reporting

Typically audit committee of board of directors

113
Q

4 things audit committee are responsible for

A

1 appointment, 2 compensation and 3 oversight of auditors

And 4 audit examination

114
Q

What do AU 265 and AS 16 require of auditors?

A

Require auditors to communicate in writing all significant internal
Control deficiencies and material weakness to client

And individuals charged with governance

115
Q

For public entities AS 16 requires communication to be made prior to…

A

Audit report release date

116
Q

What does AU 265 require for non public entities?

A

Provide communication with those charged with governance
Preferably before audit report release date

But no later than 60 days after audit report release date

117
Q

If client has not corrected deficiencies or material weaknesses, at end of audit, auditor must…

A

Communicate them in writing

118
Q

What do AU 260 and AS 16 require auditors to communicate?

A

Other significant matters (other than material weakness)

Can be communicated in writing or orally

119
Q

Management letter

A

Communication that provides a summary if auditor’s
recommendations resulting from audit engagement

Allows client to improve effectiveness and efficiency of operations

120
Q

Management letters are not required by GAAS but considered…

A

An important method of adding value to clients beyond that

Provided by audit examination

121
Q

From? To? Timing?: Engagement letter

A

From auditors

To client

Before engagement

122
Q

From? To? Timing?: Acceptance letter (signed copy of engagement letter)

A

From client

To auditors

Before engagement

123
Q

From? To? Timing?: Attorney letter response

A

From attorney

To auditors

Near date of auditor’s reports

124
Q

From? To? Timing?: Written representations

A

From client

To auditor

Date of auditors reports (audit completion date)

125
Q

From? To? Timing?: Internal control deficiencies

A

From auditors

To individuals charged with governance

After or during audit

126
Q

From? To? Timing?: management letter

A

From auditors

To client

After audit

Audit (36 decks)

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