Evidence -- Key Considerations

Question 1

What should I do:

When an audit is made in accordance with auditing standards?

Answer 1

Obtain certain written representations from management

Why?: Because these written representations help me

• confirm certain matters or to support other audit evidence

Question 2

What is a “reasonable period of time” when:

evaluating whether substantial doubt exists about the entity’s ability to continue as a going concern?

Answer 2

The reasonable time period is:

• 1 Year after the date that the financial statements are issued or are available to be issued

Question 3

What type of report would I issue if my clients legal counsel provides a statement that:

favorable outcome of legal action is highly uncertain for its ability to continue as a going concern?

Answer 3

I would express an:

• unmodified opinion with disclosure of the event in a separate emphasis-of-matter paragraph of his report

Question 4

What is the ISAs required time period for consideration of going concern issues?

Answer 4

Extending to at least, but not limited to, 1 year from the date of the financial statements

Note: Under AICPA, this period differs because

the reasonable period is 1 year after the date that the financial statements are issued or are available to be issued

Question 5

What procedure would best assist me in identifying litigation, claims, and assessments?

Answer 5

Reading the file of correspondence from taxing authorities

Question 6

What period of time should Subsequent events procedures cover?

Answer 6

From the:

• period of the date of the financial statements

To the:

• date of the auditor’s report (or as near as practicable to it)

Question 7

What should “the auditor” do when he has concluded that action should be taken to prevent future reliance on a report?

Answer 7

He should advise the client to:

• make appropriate disclosure of the facts and their impact on the financial statements to persons who are known to be currently relying; or
• who are likely to rely on the financial statements and the related auditor’s report

Question 8

Why are subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end important to “the auditor?”

Answer 8

Because they may require disclosure to keep the financial statements from being misleading

Question 9

What is a statement that would NOT be included in a client written representation?

Answer 9

“Sufficient evidence has been made available to the auditor to permit the expression of an unmodified opinion”

Why? - Because this is the Auditor’s Judgment NOT Management’s

Question 10

How would I disclose a subsequent event of such importance that disclosure is required to keep the financial statements from being misleading?

Answer 10

By providing adequate disclosure in Pro Forma Financial Statements

Note: Firm usually incorporate the pro forma balance sheets in their notes

Question 11

What situation would require the auditor to apply any other audit procedures or update the report for occurrences after the date of the report?

Answer 11

Any events that come to his attention that may have caused revision to the report

E.g. A conflict of interest situation examined by the auditor had he known about it during the audit

Question 12

What are Subsequent Events?

Answer 12

Events or transactions occurring between the balance sheet date and the date of the auditor’s report

E.g. Reviewing the latest subsequent interim financial statements

Question 13

What item/ condition would cause a substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time?

Answer 13

A recurring working capital shortages

Other signs would be

(1) Negative Trends
(2) Indications Of Financial Difficulties
(3) Internal Problems; And
(4) External Problems

Question 14

WHO is the primary source of information to be reported about litigation, claims, and assessments?

Answer 14

Client’s management

Why? - Because it is Management’s job for adopting policies and procedures;

• to identify, evaluate, and account for litigation, claims, and assessments

Question 15

What statement from a client’s legal counsel would cause “the auditor” to request clarification?

Answer 15

“I believe that the action can be settled for less than the damages claimed”

Why? - Because there is a potential liability expected

E.g. This is an evaluation that is unclear about the likelihood of an unfavorable outcome

Question 16

What is the primary reason an auditor sends an auditor requests letter of inquiry be sent to a client’s legal counsel?

Answer 16

To provide the auditor with:

• Corroboration of the information furnished by management about litigation, claims, and assessments

Note: A letter to in-house legal counsel is not a substitute for direct communication with external legal counsel

Question 17

What is one item I should obtain written management representations about?

Answer 17

Management’s compliance with contractual agreements that may affect the financial statements

Question 18

What matters do I expect to see in management’s representation letter?

Answer 18

Management specific representations about:

(1) acknowledgment of its responsibility for designing, implementing, and maintaining internal control to prevent and detect fraud
(2) knowledge of fraud or suspected fraud affecting the entity involving management, employees with significant roles in internal control, or others if the fraud could materially affect the financial statements; and
(3) knowledge of allegations of fraud or suspected fraud affecting the entity obtained in communications from employees or others

Question 19

What two limitations on an entity’s external legal counsel’s response are not scope limitations?

Answer 19

(1) matters to which the legal counsel has given substantive attention in the form of legal consultation or representation
(2) Responses limited to matters that are individually or collectively material

E.g. When the entity and the auditor have agreed on materiality limits, and management has stated the limits in the letter of inquiry

Question 20

What procedure am I most likely to perform when auditing contingent liabilities?

Answer 20

Read the minutes of the board of directors’ meetings

Why? - Because this may reveal to me whether there are any Contingent Liabilities

Note: As the auditor I am trying to find out whether Liabilities are UNDERSTATED