Chapter 18 - Completing the Audit

Question 1

Compare the financial statement treatment in terms of recognition and note disclosure for the following likelihoods of occurrence of contingencies:

1. Unlikely to occur (ASPE) or likelihood is remote (IFRS)
2. Not determinable (ASPE) or Possible (IFRS)
3. Likely to occur (ASPE) or Probable (IFRS)

Answer 1

1. Recognition = NO, Note Disclosure = NO
2. Recognition = NO, Note Disclosure = YES
3. Recognition = amount is accrued if a reliable estimate can be made, Note Disclosure = if amount cannot be reasonably estimated, then note disclosure is necessary

Question 2

What are some examples of contingent liabilities that auditors are especially concerned about?

Answer 2

• Pending litigation for patent infringement, product liability, or other actions.
• Income tax disputes.
• Product warranties.
• Notes receivable discounted.
• Guarantees of obligations of others.
• Unused balances in outstanding letters of credit.

Question 3

What are the 3 auditors objectives in verifying contingent liabilities?

Answer 3

1. Evaluate the accounting treatment of known contingent liabilities to determine whether management has properly classified the contingency (classification)
2. Evaluate the reasonableness of management’s estimate of the contingent liability (valuation)
3. Identify, to the extent practical, any contingencies not already identified by management (completeness).

Question 4

What are commitments?

Answer 4

Commitments are agreements that the entity will hold to a fixed set of conditions at a future date, regardless of what happens to profits or to the economy as a whole.

Question 5

What are some audit procedures for finding contingencies and commitments?

Answer 5

• Inquire of management – be specific
• Review notices of assessment from the CRA
• Review minutes of board of directors’ and shareholders’ meetings
• Analyze legal expenses and review invoices
• Confirmations with law firms
• Review existing working papers
• Review letters of credit and confirm used/unused portions
• Read contracts, agreements, etc.

Question 6

What is the auditor’s responsibility for reviewing for subsequent events?

Answer 6

The auditor’s responsibility for reviewing for subsequent events is normally limited to the period beginning with the balance sheet date and ending with the date of the auditor’s report.

Question 7

What are the two types of subsequent events?

Answer 7

1. Those that have a direct effect on the financial statements and require adjustment
2. Those that have no direct effect on the financial statements but for which disclosure is required

Question 8

What are some procedures performed specifically for the purpose of discovering subsequent events?

Answer 8

• Inquiry of management
• Correspondence with law firms
• Review of internal financial statements or records prepared subsequent to the balance sheet date
• Examination of minutes prepared subsequent to the balance sheet date
• Acquisition of letter of representation

Question 9

How are analytical procedures used at the completion of the audit?

Answer 9

They are useful as a final review for material misstatements or financial problems not noted during other testing to help the auditor take a final objective look at the financial statements.

Question 10

What are some specific matters that should be included in a client representation letter?

Answer 10

• Management’s acknowledgment of its responsibility for the fair presentation of the financial statements.
• Availability of all financial records and related data and all minutes of meetings of shareholders, directors, and committees of directors.
• Information concerning related party transactions and related amounts receivable or payable.
• Plans or intentions that may affect the carrying value or classification of assets or liabilities.

Question 11

What does the auditor do in the “Evaluate Results” step of audit completion?

Answer 11

The reviewer will review the conclusions reached through tests of controls, analytical procedures, and tests of details of balances for each of the functional transaction cycles audited.

Review the audit programs to make sure that all parts have been accurately completed and documented, and that risks by audit objectives have been addressed.

Complete the engagement checklist, which is a reminder of what may have been overlooked.

Question 12

What must auditors do with the accumulated unadjusted misstatements assessed as not “clearly trivial”?

Answer 12

Request that management correct them.

Question 13

What are factual misstatements?

Answer 13

Misstatements about which there is no doubt and which are clearly an error (for example, posting a sales invoice in the wrong period).

Question 14

What are judgmental misstatements?

Answer 14

Differences that arise from management’s judgment concerning accounting estimates, or the selection or application of accounting policies that the auditor considers inappropriate. These may be difficult to reconcile since they may be a matter of professional judgment.

Question 15

What are projected misstatements?

Answer 15

The auditor’s best estimate of misstatements in populations, involving projection of misstatements identified in audit samples.

Question 16

If the auditor believes that there is sufficient evidence but that the financial statements are materially misstated, the auditor has two choices:

Answer 16

1. the statements must be revised to the auditor’s satisfaction, or
2. a modified audit opinion must be issued.

Question 17

What items must the auditor communicate to those charged with governance? (5)

Answer 17

1. Material weaknesses in design, implementation or operation of internal control
2. All misstatements except clearly trivial
3. Illegal acts of which the auditor is aware
4. Unusual actions that increase the company’s risk of loss
5. Other findings of the auditor’s choosing

Question 18

What are the two reasons auditors write management letters?

Answer 18

1. to encourage a better relationship between the public accounting firm and management, and
2. to suggest additional tax and management advisory services that the public accounting firm can provide.

Question 19

Why are contingent liabilities difficult to identify?

Answer 19

One of the key audit steps for locating contingent liabilities is discussion with management or others charged with governance of the organization. If management does not disclose the contingent liability to the auditors, then it is difficult to detect.

Question 20

When reviewing legal expenses, which transactions should the auditor examine, and why?

Answer 20

The auditor should review all legal expense transactions by tracing to source documents since they could indicate potential lawsuits. The lawyers’ invoices will provide details of what claims they had been providing legal advice.

Question 21

Why is partner examination of final analytical review important?

Answer 21

The partner in charge of the engagement has broad experience with the client and other businesses that facilitates the identification of unusual relationships that may require the conduct of additional audit procedures.

Question 22

Describe management’s and the auditor’s responsibilities with respect to the going concern
assumption.

Answer 22

Management is required to clearly disclose the financial position of the entity, including its ability to function as a going concern, in the financial statements.

The auditor’s responsibilities are to assess management’s conclusions. This is a difficult area to audit since the auditor is assessing management’s future plans (which may be overly optimistic).

• Where the auditor believes that managements’ disclosures are not sufficient, the auditor may be required to provide additional information in an Other Matters Paragraph in the auditor’s report.
• The auditor may also need to provide an Emphasis of Matter Paragraph to highlight the potential going concern problem in the auditor’s report.

Question 23

What method does the auditor use to determine whether sufficient appropriate audit evidence has been collected?

Answer 23

Audit evidence is assessed in relationship to the risks identified during the planning stage of the audit, in relationship to risks by audit objectives and assertions, and to address any problem areas that were discovered during the audit.

Question 24

What is the purpose of the engagement quality control review?

Answer 24

The engagement quality review is unbiased risk-based review, with the reviewer paying particular attention to significant judgments made by the engagement team and the conclusions reached in formulating the report.

Question 25

What are some procedures used for the engagement quality control review?

Answer 25

• Evaluating the procedures performed by the engagement team to evaluate team and firm independence;
• Evaluating the engagement team’s assessment of and responses to significant risks, including fraud risks;
• Evaluating whether significant matters noted in the engagement were satisfactorily resolved;