CH 24 Flashcards
What are the four presentation and disclosure’s audit objectives?
1) Occurrence and rights and obligations ( review debt contracts to determine that accounts receivable are pledged as collateral)
2) Completeness ( use a disclosure checklist to determine if the financial statements include all disclosures required by accounting standards.)
3) Classification and understandability ( Review financial statements to determine if assets are properly classified between current and non-current categories. Read the footnotes for clarity.)
4) Accuracy and valuation ( Reconcile amounts included in the long term debt footnotes to information examined and supported in the auditor’s long term debt audit working papers.)
Define Contingent liability
1) potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place.
What are the likelihood of occurrence and financial statement treatment?
1) remote ( slight chance)
2) reasonably possible ( more than remote, but less probable)
3) Probable ( likely to occur)
What are auditor’s concerns?
1) pending litigation for patent infringement, product liability, or other actions
2) product warranties
3) Notes receivable discounted
4) Guarantees of obligations of others
5) Unused balances of outstanding letter of credits
What are audit procedures for finding contingencies?
1) management inquiry
2) Review BOD meeting minutes
3) Review revenue agent reports
What are audit procedures for finding contingencies that involve review audit work papers?
1) Review legal invoices
2) Obtain attorney letter. Re: litigation
3) Examine letters of credit
What are the inquiry of client’s attorneys?
1) pending threatened litigation
2) asserted or unasserted claims or assessments with which the attorney has involvement.
( attorney must be present to furnish information or comment about the progress each item listed).
From inquirying with client’s attorney, what is law firm request consist of?
1) identify any unlisted pending or threatened legal actions
2) the statement should involve attorney’s responsibility to inform management of legal matters.
What does SOX require attorneys to follow?
1) serving public companies to report material violations of federal securities
2) amended attorney-client confidentiality rules
What are the types of subsequent events?
1) Those that have direct effect
on FS
2) Those that do not have a direct effect on the financial statements
When is a statement requiring an adjustment ( if material)
1) Declaration of bankruptcy by a customer with an accounts receivable balance
2) Settlement of a litigation at an amount different from the amount recorded on the books
3) Disposal of equipment not being used in operations at a price below the current book value.
When is there an advisability of disclosure?
1) Issuance of bonds or equity securities
2) Decline in the market value of inventory as a consequence of government action barring further sales of a product
3) Uninsured loss of inventories as a result of fire
4) A merger or an acquisition
What are two categories of audit procedures for the subsequent events review?
1) procedures normally integrated as a part of the verification of year end account balances
2) Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events
What are six audit tests required for subsequent review events?
1) review records prepared subsequent to the balance sheet date
2) Review internal statements prepared subsequent to the balance sheet date
3) Examine minutes issued subsequent to the balance sheet date
4) Correspond with attorneys
5) Inquire of management
6) Obtain a letter of representation
What are final evidence of accumulation?
1) Perform final analytical procedures
2) Evaluate the going concern assumption
3) Obtain a management representations letter
4) Consider supplementary information in relation to financial statements as a whole
5) Read other information in the annual report
What are the three final analytical procedures when partner reads financial statements and footnotes?
1) Considers adequacy of evidence
2) Unusal or unexpected balances or relationships
3) Unusual items not previously identified
What are going concern assumptions?
1) evaluate a client’s ability to continue operating another year
a) assess as part of initial planning
b) update based on audit results
c) Use analytical procedures and make final assessment
What are four categories in management representation letter?
they are auditing standards:
1) responsibility for financial statements
2) Completeness of information
3) recognition, measurement, and disclosure
4) Recording and disclosing subsequent events
What are evaluate results?
1) sufficient appropriate evidence
2) Evidence supports auditor’s opinion
3) Financial statement disclosures
4) Audit documentation review
5) Independent review
6) Summary of evidence evaluation
