Ch 15: Completing the Audit Flashcards
According to FASB what do you do with a potential gain?
never record
How are material loss contingencies treated?
recorded at their probable and reasonable estimate
what to do if there is a remote possibility of a loss contingency
nothing (maybe make a blanket statement in notes) usually too risky to record
what to do if a material loss is reasonably possible?
disclose only
what does reasonably possible mean in connection to material loss contingencies
it is probably but there’s not reasonable estimate
Do auditors need permission to communicate with attorneys for inquiries?
yes
What are the audit procedures for reviewing contingent liabilities?
- read BOD minutes
- review contracts, loan agreements, leases, correspondence with governmental agencies
- review income tax liability, tax returns, IRS
- confirm with financial institutions regarding guarantees
- obtain legal letter
AU at the beginning of a provision is for what (ASB or PCAOB)
ASB
AS at the beginning of a provision is for what (ASB or PCAOB)
PCAOB
what is the purpose of inquiring of client’s legal counsel
searching for loss contingencies arising from litigation, claims (asserted and unasserted) and assessments
when are confirmations to client’s legal counsel sent
as close as possible to the end of fieldwork
refusal to furnish legal confirmations is a _____________
scope limitation
what is the information requested from the attorney in the confirmation (hint: there are 4)
- description of current lit
- likelihood of unfavorable outcome and estimate of loss
- comments/ likelihood of unasserted claims
- management’s claims are complete
Is the auditor responsible for events occurring after the period covered by the financial statements being audited?
Yes if there are any major (material) events
what is the subsequent period?
from the end of the period covered by the FS and the end of fieldwork/ date of auditor’s report
what is a type I event
reveals or confirms conditions existing at or before the BS date and require adjustments to the FS
a major customer declaring bankruptcy after YE but before end of field work date is an example of which type of subsequent event? What will they have to do?
type I event; adjustment and note disclosure
what is a type II event
reveals conditions arising after the BS date and require disclosure in, not not adjustment to, the financial statements
what type of subsequent event would it be if the BOD meets on 2/1/2026 and decides to issue new C/S on 6/1/2026? what will they have to do?
type II event; includes the news in a not disclosure
what is the acronym for audit procedures to detect subsequent events? * know this*
PRIME
what does the PRIME acronym for audit procedures to detect subsequent events stand for
P: post balance sheet transaction
R: representation letter obtained from management
I: inquiry (ask client and client’s attorney
M: minutes of meetings (BOD, stockholders)
E: examine latest interim FS (montly FS after YE)
what are the steps to the engagement wrap (5)
- analytical procedures
- final evaluation of audit findings
- completion of working paper review
- engagement quality review
- completion of documentation
are analytical procedures requires at the end of the audit?
yes
what do analytical procedures at the end of the auditor assess?
the conclusion reached on the FS components
what do analytical procedures at the end of the audit help evaluate
the overall financial statement presentation
what is done in the final evaluation of audit findings
- evaluate materiality
- reconsider assessment of control risk and risk of fraud
- evaluation of misstatements identified during the audit
what can be adjusted throughout the audit
materiality, control risk, fraud risk
if low scale fraud is discovered what do auditors do?
report to management at least one scale above the fraus
if senior management is committing fraud what do auditors do
report to audit committee (not all BOD)
audit committee should be ________
independent
if audit takes not action on fraud reported what should auditors do
quit and file an 8k (change of auditors) with the SEC
what are factual misstatements
flat out errors that management should correct
what are judgmental misstatements
if management don’t adjust to the auditor’s estimation then the diff is considered a misstatement and auditors need to doc why management didnt adjust
when evaluating uncorrected misstatements what should an auditor do
consider PY uncorrected misstatements with the CY uncorrected misstatements
why would auditors want to look at PY and CY uncorrected misstatements
because immaterial misstatements could aggregate to material
what happens in completion of working paper review
work is reviewed by a team member with seniority
work performed should ____________
support conclusions reached
engagement quality reviewers review ___________ risk areas
higher
who can be an engagement quality reviewer
typically a partner that didn’t perform any work on the audit
does an engagement quality reviewer have to be independent?
yes
how long must a public company retain an audit file
7 years
how long must a private company retain an audit file
5 years
going concern means what
the company will continue operating into the foreseeable future
What is the GAAP rule concerning what to do if there is substantial doubt about the going concern of a company
management must disclose
what are the audit procedures during risk assessment and risk response (hint: there’s 3)
- inquiry of mgt and attorneys
- analytical procedures (declining performance)
- inquiry of mgt about events beyond 1 year period
what to do if there is substantial doubt about going concern (hint: there’s 3)
- inquire of management about “mitigating factors”, gather evidence to support managements plans
- inspect management’s note disclosures
- discuss among the audit team the effect on the auditor’s report if any
what are the three main purposes of management representation letter
- to confirm representations explicitly or implicitly given to the auditor
- to indicate and document the continuing appropriateness of such representations
- to reduce the possibility of misunderstanding concerning matters that are the subject of the representations
what are the 4 main components of a management representation letter
- financial statements and ICs (mgt responsible)
- completeness of information made available to the auditor (all fin data provided)
- recognitions, measurement and disclosure (applied GAAP)
- subsequent events and disclosures (final paragraph)
the management representation letter is signed by who
CEO and CFO
communications with audit committee can be written or verbal but must be documented in ___________________
the working papers
what are the disagreements with management usually about
- appropriateness of significant accounting policies
- process used by management in developing sensitive accounting estimates
PCAOB (public company’s) word for an important audit matter
CAM- critical audit matter
what is a CAM
in public companies it’s material financial statement accounts or disclosures and especially challenging, subjective, or complex auditor judgment
a CAM is _________ to be discussed in audit report
required
ASB (private company) word for an important audit matter
KAM - key audit matter
a KAM is _________ to be included in the audit report
optional
auditors have to be ___________ to include KAMs
paid
what is a loss contingency
an existing condition or situation involving uncertainty as to possible loss
what are three items included in a legal letter
- date of the letter
- request for information
- response regarding pending or threatened litigation
whose responsibility is it to make needed adjustments or disclosures related to material subsequent event
management
what happens if management doesn’t take proper action that is required for the financial statements to be fairly presented
auditors may not be able to issue an unmodified opinion
why is it important to reassess materiality at the end of the audit
ensure it’s still appropriate based on the results of audit procedures performed
what is meant by the assembly portion of “assembly and retention” of the audit files
assembly- admin tasks like sorting and organizing working papers, discarding old documents that were replaced with updated ones, and signing off on completion checklists relating to assembling file
what is meant by the retention portion of “assembly and retention” of the audit files
retention- refers to how long the firm must maintain a secure copy of the audit documentation
how does going concern affect a company’s accounting
assets and liabilities are recorded on the basis that the entity will realize its assets and discharge its liabilities in the normal course of business
what are 3 factors that might indicate the going concern assumption may be at risk
if working capital is not sufficiently high, a major customer has stopped doing business with the client, legal developments
explain some mitigating factors that could offset possible going concern issues
company’s ability to raise additional capital by issuing stock or obtaining a bank loan, reducing expenses, ability to sell an unprofitable segment of business
what characteristics of an estimate would classify it as a critical accounting estimate
those whose nature and impact on financial statements are material because of the high levels of subjectivity and judgement necessary to account for highly uncertain materials
