Chapter 16: Completing the Audit

Question 1

What actions must an auditor take prior to completing an audit?

Answer 1

1) Perform Final Analytical Procedures, 2) Assess the Reasonableness of Accounting Estimates, 3) Summarizing Unrecorded Immaterial Audit Adjustments, 4) Ensure the Adequacy of Disclosures, 5) Evaluate the Going Concern Assumption, 6) Review/Obtain Management Representations, 7) Search for and Evaluate the Adequacy of Accounting for Contingencies, 8) Search for and Evaluate the Adequacy of Accounting for Subsequent Events, 9) Concurring Partner Review, 10) Draft a Management Letter, 11) Communicate with the Audit Committee, 12) Draft and Issue the Audit Report

Question 2

What is the objective of performing final analytical procedures?

Answer 2

to determine whether audited company’s financial statements make sense given what the auditors know about the company and environment it operates in

Question 3

Why is a final analytical review necessary?

Answer 3

because when auditors are testing individual accounts they must examine significant amount of detailed information and it is easy to get lost in the detail and lose sight of whether the F/S provide materially accurate reflection of economic reality

Question 4

When auditor’s are assessing the reasonableness of significant estimates, in what areas is it necessary for auditors to provide reasonable assurance?

Answer 4

1) Management has adequate information system to develop estimates that could be material to F/S, 2) Estimates are reasonable, 3) Estimates are presented in conformity with GAAP

Question 5

What do auditors need to ensure about unrecorded immaterial audit adjustments?

Answer 5

Make sure the sum of all possible adjustments that were not booked is not material

Question 6

What happens if unbooked misstatements are material in aggregate?

Answer 6

F/S must be adjusted to correct these mistakes

Question 7

Why do auditor’s need to make sure that what is reported in the F/S and footnotes is sufficient?

Answer 7

to provide an accurate picture of the economic reality regarding the client’s financial position and performance

Question 8

What are auditor’s testing when reviewing the disclosures in the footnotes and F/S?

Answer 8

the validity of the disclosure assertions

Question 9

When is a going concern opinion issued?

Answer 9

when auditors determine that there is doubt that company will survive the next year

Question 10

What are the two forms of management representation that must be reviewed?

Answer 10

management certification of financial statements and management representation letter

Question 11

What is the management representation letter?

Answer 11

letter that auditors require management to send to auditors to indicate that management takes responsibility for F/S and that written and oral representations to auditors have been accurate

Question 12

What date is the management representation letter dated?

Answer 12

the same date as the audit report

Question 13

What are contingencies?

Answer 13

events that might occur in the future, which could have either a positive or negative effect on the financial position of the company

Question 14

How do companies account for contingent liabilities?

Answer 14

1) Recognition and disclosure, 2) Disclosure only, 3) Do nothing

Question 15

What is recognition?

Answer 15

indicates company’s records liability in company’s balance sheet and corresponding expense in IS

Question 16

What is disclosure?

Answer 16

contingent liability is disclosed in footnotes to F/S, but is not recognized as liability on BS

Question 17

What determines how a contingent liability is accounted for?

Answer 17

probability of occurrence and whether it can be reasonably estimated

Question 18

When are contingent liabilities recognized and disclosed?

Answer 18

when probably and reasonably estimatable

Question 19

When are contingent liabilities just disclosed?

Answer 19

when reasonably possible or cannot be reasonably estimated

Question 20

When are contingent liabilities not recognized or disclosed?

Answer 20

when they are remote

Question 21

How do auditors accomplish determining whether a company has accounted for contingent liabilities in accordance with GAAP?

Answer 21

make inquiries of management regarding existence and expected outcomes of contingent liabilities

Question 22

How do auditors obtain audit evidence to corroborate management’s representations?

Answer 22

Attorney’s Letter, letter of audit inquiry

Question 23

What date is the Attorney letter dated?

Answer 23

same date as the audit report

Question 24

What is a subsequent event?

Answer 24

event that takes place after balance sheet date but before the audit report has been filed that requires treatment in the F/S and/or footnotes

Question 25

What are the types of subsequent events?

Answer 25

Type 1 and Type 2

Question 26

What is Type 1 subsequent event?

Answer 26

affects balances on BS, provides evidence about conditions that existed at the BS date and requires an adjustment to the account

Question 27

How are Type 1 subsequent events accounted for?

Answer 27

footnote and adjustment to F/S

Question 28

What is a Type 2 subsequent event?

Answer 28

event that does not provide evidence about conditions that existed at BS date, does not affect balances on BS

Question 29

How are Type 2 subsequent events accounted for?

Answer 29

footnote

Question 30

What is concurring partner review?

Answer 30

audit partner that is not part of audit team but has expertise regarding client’s industry reviews audit workpapers to make sure audit itself and workpapers are complete and support audit opinion

Question 31

What is a management letter?

Answer 31

letter written by auditor to management which makes recommendations to management regarding ways to improve operations and/or internal controls

Question 32

What do auditors need to convey to the audit committee at the end of the audit?

Answer 32

1) Auditors responsibilities, 2) Processes management uses to make accounting estimates, 3) All audit adjustments made, 4) Uncorrected misstatements, 5) Accounting policies and treatments that management selected and any changes in policies or treatments and alternative treatments that could have been used, 6) All significant and material IC deficiencies

Question 33

What does an audit report communicate?

Answer 33

1) What was audited and the division of responsibility for the F/S between client’s management and auditor (introductory paragraph), 2) Nature of the audit process (Scope paragraph), 3) Auditor’s opinion on fairness of F/S (opinion paragraph), 4) If applicable, reason why standard unqualified opinion cannot be expressed