Exam 3 - Chapter 24 - Completing the Audit Flashcards
Key concept:
Understanding of the 7 key audit procedures during the completion phase
What are the seven stages of completing the audit (Phase 4)?
- Additional tests for presentation/disclosure
- Review for contingent liabilities
- Review for subsequent events
- Accumulate final evidence
- Evaluate results
- Issue audit report
- Communicate with audit committee and management
Give a brief description of the need for additional tests for presentation and disclosure during phase 4:
In phase 4, auditors assess whether additional evidence for presentation and diclosures are needed based on evidence gathered in first 3 phases.
Auditors evaluate whether the overall presentation of financial statements and footnotes complies with accounting standards.
One of the _primary concern_s related to presentation and disclosure related objectives:
What substantive procedure might be used to satisfy this concern?
Determining wehther management has diclosed all required information (completeness objective)
substantive procedure to use:
Disclosure checklist (includes all disclosures required by accounting standards)
What is a contingent liability?
Potential future obligation to an outside party for unknown amounts for something that has already taken place and will be resolved in the future.
Contingency footnotes are necessary when:
Likelihood of occurence
- Remote = no footnote
- Reasonably possible = Footnote required
- Probable = amount included in financials (if estimable)
List the most common contingencies:
- Pending litgation
- income tax disputes
- Product warranties
- Notes receivable discounted
- Guarantees of obligations of others
The auditor’s primary objectives in verifying contingent liabilities:
- Evaluate the accounting treatment of contingencies and determine if mgmt has properly classified the contingency
- Identify any contingencies not identified by management (if practical)
What are some tactics in identifying/finding contingent liabilites?
- Inquire management
- Review CY and PY IRS agent reports for tax settlements
- Review minutes of board meetings
- Analyze legal expense account and support with 3rd party
- Obtain letters from attorneys
- Examine audit documentation
- Examine letters of credit
The standard inquiry of the client’s attorney should ask for:
- A list of pending litigation
- A list of claims/assessments the attoney was involved in
- A request that the attorney provide comment about progress of each listed item
- A request to identify any unlisted pending/threatened litigation or a confirmation of client’s list is complete
- Statement of attorney’s responsibility to inform management of any litigation that should be included
If attorneys refuse to provide information about material existing lawsuits or unasserted claims
what should the auditor do?
This qualifies as a scope limitation:
Auditor is to issue a qualified opinion or disclaimer of opinion.
What is the review for subsequent events?
Auditor reviews transactions/events that occured after balance sheet date
Determines if events affect fair presentation of current period statements.
For which period are auditors responsible for evaluating subsequent events?
What are the 2 type of subsequent events that require consideration from mgmt and evaluation by auditors>
- Events taht have direct effect on FS and require adjustements
- Those that do not have direct affect but require disclosure
What types of subsequent events require adjustments to the financial statements?
- Declaration of bankruptcy by major customer with receivable balance
- Settlement of litigation losses
- Disposal of equipment/inventory at material loss
- Sale of investments for amount materially less than cost
