Evidence -- Key Considerations 2

Question 1

What will Legal counsel’s response to an auditor’s request for information regarding litigation, claims, and assessments usually contain?

Answer 1

An explanation regarding limitations on the scope of the response

Question 2

What is the appropriate date for the client to specify as the effective date in the audit inquiry to legal counsel?

Answer 2

As close a date to the auditor’s report as possible

Note: The auditor should specify the earliest acceptable effective date of the response; and

• the latest date by which it is to be sent to the auditor

E.g. A 2-week period between these dates is generally acceptable

Question 3

What information in the entity’s legal counsel’s letter regarding litigation, claims, and assessments would cause “the auditor” to request further clarification?

Answer 3

“I believe that the plaintiff will have problems establishing any liability”

Why? - Because this statement does not clearly state the;

• the amount or range of a potential loss

Question 4

What procedure should I perform to evaluate loss contingencies?

Answer 4

Obtain a letter of audit inquiry from the client’s lawyer

Why? - Because this is a primary way to;

• corroborate the information management provides about litigation, claims, and assessments

Question 5

What steps should I take if I learn of certain related party transactions that occurred during the year under audit that; were not disclosed in the notes to the financial statements?

Answer 5

(1) Discuss the matter with management and those charged with governance
(2) Determine whether the financial statements need revision

Note: If the financial statements need revision, inquire how management intends to address the matter in the statements

Question 6

What event occurring after the date of the audit report would cause the auditor to make further inquiries about the previously issued financial statements?

Answer 6

The discovery of information regarding a contingency that existed before the financial statements were issued

Question 7

What procedure would an auditor most likely perform to obtain evidence about subsequent events?

Answer 7

Investigating changes in noncurrent debt occurring after year end

Why? - Because this may reveal (material) increases in capital or issuance of debt

Question 8

Which parties may reach an understanding on limits of materiality for the purpose stated in the letter of inquiry to the client’s legal counsel?

Answer 8

The auditor and the client’s management

Note: The letter of inquiry is PREPARE by Management and SENT by the auditor to management’s legal counsel

Question 9

What happens if current management was not present during all periods covered by the auditor’s report?

Answer 9

The auditor should nevertheless obtain written representations from current management for all such periods

Question 10

If management plans to present comparative financial statements (i.e. Year 1 and 2), and the auditor presents the report on the comparative financial statements in Year 3,

• what period should be covered by management’s representation letter?

Answer 10

All 3 Years should be covered in management’s Representation Letter

Note: If new management recently arrived, they should cover the whole period regardless of when they took over

Question 11

What is a reasonable mitigating factor for management in plans for dealing with the an inability to continue as a going concern?

Answer 11

Increase ownership equity

Why? - Because this helps management to increase capital and accelerate cash receipts from investors or affiliates

Question 12

What type of procedure would an auditor perform regarding obtaining evidence about the occurrence of subsequent events?

Answer 12

Investigating changes in debt recorded after year end

Why? - Because this may reveal whether;

• increases in capital or issuances of debt have occurred

Question 13

What should the auditor do regardless if a client provides written representation, that the financial statements are not false, misleading and are to be relied upon?

Answer 13

The CPA is still required to perform an INDEPENDENT investigation

Note: This helps the CPA avoid possible lawsuits for providing;

(1) False, Misleading or Negligent assurance for financial information believed to be relied upon

Question 14

What IS a statement that would be included in the “Audit inquiry letter to legal counsel?”

Answer 14

“In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies”

Question 15

What is an example of a management imposed SCOPE Limitation?

Answer 15

The refusal of a client’s legal counsel to provide a representation on the legality of a particular act committed by the client

Note: A statement from legal that;

“It would be inappropriate for this firm to respond to a general inquiry relating to the existence of unasserted possible claims and assessments,”

This is NOT considered a scope limitation

Question 16

What is the purpose of Dual-Dating for Subsequent Events?

Answer 16

Dual-dating indicates that the procedures performed subsequent to (i.e. AFTER) the original date are limited to the revision

Note: Unless the auditor extends subsequent events procedures to a new date (i.e. The date when the subsequent fact became known), the auditor should dual-date the report

Question 17

What procedure would reveal potential litigation, claims, and assessments?

Answer 17

Reading the file of correspondence from taxing authorities

E.g. This communication may reveal possible tax assessments excluded by the client

Question 18

What are some example of conditions that did not exist at the date of the balance sheet but that arose subsequent to (AFTER) that date?

Answer 18

a. Sale of a bond or capital stock issue
b. Purchase of a business
c. Settlement of litigation when the precipitating event occurred after the balance sheet date
d. Loss of plant or inventories as a result of fire or flood
e. Losses on receivables resulting from conditions (e.g., a customer’s major casualty) arising after the balance sheet date