Final steps Flashcards
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What is a contingent liability?
An existing condition involving uncertainty as to possible loss resolved by a future event.
What is the likelihood threshold for a ‘probable’ contingent liability?
Greater than 50%.
What is the likelihood range for a ‘reasonably possible’ contingent liability?
More than 10% but less than 50%.
What is the likelihood for a ‘remote’ contingent liability?
Less than 10%.
Give examples of contingent liabilities.
Pending litigation, claims, tax disputes, product warranties, guarantees, repurchase agreements.
Name one document auditors review to identify contingent liabilities.
Minutes of meetings, contracts, leases, government correspondence.
What should auditors confirm to identify contingent liabilities?
Guarantees and letters of credit.
What legal document do auditors obtain for contingent liabilities?
A legal letter describing and evaluating litigation, claims, or assessments.
What written assurance do auditors obtain from management regarding contingencies?
A representation letter confirming disclosure per FASB ASC Topic 450.
What is a Type I subsequent event?
Conditions existed before the balance sheet date and affect financial statement estimates.
What is a Type II subsequent event?
Conditions did not exist at the balance sheet date and do not affect statement accuracy.
What are the two options for dating an auditor’s report for a subsequent event?
Dual dating or changing the report date.
Name two procedures to detect subsequent events.
Inquire of management, read interim financials, examine books, read minutes, inquire of legal counsel.
What must auditors of US public companies report on post year-end?
Changes in internal control affecting financial reporting.
What is the purpose of final analytical procedures?
To assess audit conclusions and evaluate financial statement presentation.
What is a management representation letter?
A written document from management confirming oral representations.
Why are working papers reviewed?
To ensure audit evidence is sufficient and misstatements are evaluated.
What is an engagement quality review?
An independent review by a partner not involved in the audit to ensure quality.
What is the auditor’s responsibility regarding going concern?
Evaluate if substantial doubt exists about the entity’s ability to continue for one year.
What financial indicators suggest going concern issues?
Negative trends, defaults, legal proceedings, cash flow issues.
What should the auditor do if facts are discovered after report issuance?
Notify the entity, regulatory agencies, and users of the report.
What kind of event is a warehouse flood after year-end?
Type II event; disclose but no adjustment.
Bankruptcy of a customer after year-end affects which estimate?
Accounts receivable; Type I event; requires adjustment.
Recording sales before shipment completes is what issue?
Cutoff error; financials must be adjusted.
Being sued by an employee post year-end requires what consideration?
Contingent liability; evaluate and possibly disclose.
Issuing debentures after year-end is what kind of event?
Type II; requires disclosure only.
Should financials be prepared on historical cost if liquidation is voted on before year-end?
No, liquidation basis should be used if plan is approved before balance sheet date.
Would basis change if liquidation vote occurred after year-end?
Yes, historical cost may be used if the vote occurred after the balance sheet date.
