Chapter 11 Flashcards
What is the general timeline for major activities in audit?
- Beginning of the year
- Year- End Date (date of the financial statements)
- Date of the auditor’s report (audit completion date)
- Audit report release date
What occurs between the beginning of the year and the year-end date (the date of the financial statements)?
Interim testing (tests of controls and substantive procedures)
What happens between the year-end date and the date of the auditor’s report (the audit completion date)?
- Complete substantive procedures
- Attorney’s letters
- Written representations
- Going-concern assessment
- Adjusting journal entries
- Audit documentation review
- Subsequent events
What happens between the date of the auditor’s report and the audit report release date?
Subsequently discovered facts
What happens after the audit report release date?
- Subsequently discovered facts
- Omitted audit procedures
What procedures are encompased in “complete substantive procedures”?
- Roll-forward procedures
- Analytical procedures
- Accounting estimates
Roll-forward procedures
Extend work from interim period to date of the financial statements
Roll-forward procedures include both…
Tests of controls and substantive procedures
When are roll-forward procedures performed?
Following the date of hte financial statements
What is the objective of roll-forward procedures?
Idea is to obtain evidence through the date of the financial statements
Analytical procedures are…
required as an overall review
What are analytical procedures evaluating?
- The adequacy of evidence gathered in response to unexpected account balances/relationships among balances IDENTIFIED during the audit
- Unusual/unexpected account balances or relationships among balances that were not previously identified
During analytical procedures auditor should review accounts for…
“miscellaneous,” “other,” and “clearing” accounts - may relate to earnings management
Generic or one-off accounts (like manual entries) could be used to…
manage earnings (this is a risk point for the audit)
The hope during analytical procedures is to…
Have nothing unexpected - this is one of the final stages of the audit
What are examples of accounting estimates?
- future cash flows in evaluating asset impairments
- allowance for doubtful accounts for receivables
- depreciation lives for fixed assets
What should auditors review when looking at accounting estimates?
- Management’s process for developing estimates
- Reasonableness
What is the process for attorney’s letters?
- Auditors initiate request for attorney letter
- Auditors send lettter to the attorney including information related to litigation, claims, and assessments
- The client prepares listing, description, and evaluation of litigation, claims, and assessments for the letter
- The attorney responds to the auditor regarding the client’s description of litigation, claims, and assessments contained in the legal letter
Attorney’s letters are very similar to…
confirmations
What are attorney’s letters specifically used for?
contingent liabilities
Attorney/client privilege
Risk in the process of attorney’s letters - the client can instruct the attorney not to disclose things
Written Representations are provided by…
management to the auditors
When are written representations dated?
The date of auditors’ report (audit completion date)
What is the purpose of written representations?
- Impress upon management its primary responsibility for the financial statements
- May establish auditors’ defense if a question related to inquiries subsequently arises (Cover Your Ass Letter)
If written representations are not provided by the client, what is typically the result?
Auditors typically withdraw or disclaim an opinion… they can also qualify the opinion
Is the going-concern assessment required by GAAP?
Yes
What is the going-concern assessment?
Auditors required to consider whether evidence obtained during audit raises questions about ability to continue as a going concern
If there are concerns about the going-concern, management creates plans to mitigate. What happens if concerns do not remain?
No effect on report or financial statements
If there are concerns about the going-concern, management creates plans to mitigate. What happens if concerns remain?
Management should use going concern basis of accounting and auditors modify audit report (emphasis of matter paragraph)
What are the steps for accounting for adjusting entries?
- Accumulate dollar effects of identified misstatements
- Evaluate materiality (both quantitative and qualitative)
- Recommend adjustment of all misstatements identified
- Communicate all adjustments/misstatements to audit committee or individuals charged with governance
Can management choose not to adjust misstatements?
Yes…but they typically correct every misstatement
What happens to uncorrected misstatements?
They are carried forward for consideration in future audits
Audit Documentation Review - Audit supervisor
Have all steps in audit plan been performed?
Is referencing among documentation clear?
Are explanations understandable?
Audit Documentation Review - Audit manager and partner
Is the overall scope of the audit adequate?
Do overall conclusions support the opinion?
Audit Documentation Review - Reviewing partner
Are the quality of audit work and reporting consistent with quality standards of the firm?
Engagement quality review
When do subsequent events occur?
between the date of the financial statements and date of the auditors’ report
Procedures to Identify Subsequent Events
- Often identified during execution of audit procedures
- Obtain understanding of procedures management performs to identify subsequent events
- Inquire of management and those charged with governance
- Read minutes of meetings of owners, management, and those charged with governance
Confirmation of receivables may identify…
deterioration of customer’s financial condition
Attorney letter may identify…
need to accrue a contingent liability
British Petroleum – oil spill in Gulf of Mexico
As soon as that happened BP knew they were going to get sued. GAAP requires there to be an immediate disclosure if that is right before year end - contingent liability
What are the types of subsequent events?
Type I Event
Type II Event
Type I Subsequent Event
Additional evidence of conditions that existed at the balance sheet date
What is the result of a Type I Subsequent Event?
Requires adjustment of the financial statements
Type II Subsequent Event
Conditions did not exist at the balance sheet date and do not affect the fairness of the financial statements
What is the result of a Type II Subsequent Event?
Requires disclosure and possibly pro forma financial statements
Pro forma
“as if”
What is an example of a Type I Subsequent Event?
goods are returned after year end, GAAP would say that those sales need to be written off, or included in a contra account, etc. Make good estimates.
What is an example of a Type II Subsequent Event?
sale of business, sale of stock, issuance of bonds, loss of facility from casualty
What happens on the audit completion date?
auditor has sufficient appropriate evidence and is making a conclusion
Who releases the audit report?
Really it’s the client… it is released in the 10-K
Subsequently Discovered Facts
Facts that become known to the auditors after the date of the auditor’s report that, had they been known at that time, may have caused the auditors to revise their report
If subsequently discovered facts are discovered prior to audit report release date and after audit report date…
The auditors perform procedures related to items
What are the two options for auditors when subsequently discovered facts are discovered prior to audit report release date and after audit report date?
- Revise the date of auditor’s reports to reflect new completion date (extends liability)
- Dual date auditor’s report (limits liability) - most common!
Following audit report release date: If facts would result in revision of auditors’ report or F/S AND individuals are relying on F/S…
- Notify individuals relying on the financial statements
- Issue revised financial statements which provide disclosure of facts
We realize we issued a clean opinion on 2004 financial statements and shouldn’t have…
No one is RELYING on these financial statements anymore… no need to do anything
We realize we issued a clean opinion on 2022 financial statements and shouldn’t have…
People are still relying on these…restatement
Ambrose is auditing the financial statements of Mays (dated 12/31/2023). The date of the auditor’s report is 2/17/2024, and the audit report release date is 2/20/2024. For which of the following matters would Ambrose have the least responsibility?
A. The obsolescence of inventory held on 12/31/2023, that was identified on 1/20/2024. Subsequent event
B. A customer’s deteriorating financial condition that was identified on 2/19/2024.
C. A merger that was announced by Mays and known by Ambrose on 2/12/2024.
D. A major loss due to catastrophe that occurred and was known by Ambrose on 3/1/2024.
D. is the correct answer
A. is a type I subsequent event
B. is a subsequent discovery
C. is a type II subsequent event
Omitted Procedures
Situation where the auditor realizes an audit may not have been performed in accordance with GAAS.
Omitted procedures should be performed if…
- Omitted procedures impair auditor’s ability to support a previously expressed opinion, and if
- Individuals are currently relying on financial statements and auditors’ reports
After performing omitted procedures, if the previous opinion can be supported…
No further action is necessary
After performing omitted procedures, if the previous opinion cannot be supported…
Auditors should:
1. withdraw the original report
2. issue revised reports
3. inform persons currently relying on the financial statements (the client has to notify investors)
