Completing the Audit

Question 1

What qualitative factors should an auditor consider when deciding whether known misstatements are material to the financial statements?

Answer 1

1, Effect of the misstatement on contractual obligations.

2. Effect of the misstatement on earnings trends.
3. Whether the misstatement changes a loss into a reported profit.

Question 2

What issues are typically addressed in the management representation letter?

Answer 2

Mgmt’s responsibility for preparing the financial statements.
Mgmt’s belief that the financial statements are presented fairly in accordance with GAAP.
Mgmt has not withheld any relevant info from auditors.
Mgmt has reported all known instances of fraud and illegal acts to the auditors.
Mgmt has disclosed all related party transactions.
The client has satisfactory title to all owned assets.

Question 3

Who should sign the management representation letter?

Answer 3

The CEO and CFO.

Question 4

What must a company disclose in its financial statements when it engages in related party transactions?

Answer 4

1. The nature and substance of the relationship.
2. A description of the transaction(s)
3. The dollar amounts of the transaction(s)
4. Balances due from or owed to related parties at year-end.
5. Other relevant information required to understand the impact of the transactions on the financial statements.

Question 5

What events may suggest to an auditor that undisclosed related party transactions may be occurring?

Answer 5

Assets purchased or sold at unusual prices.
Lending or borrowing at unusual interest rates.
Unsecured loans to parties with limited ability to repay.
Sales with unusual payment or return terms.