Lec 17 Pt1 Flashcards
what are the 4 considerations at the end of an audit
- was SAAE gathered
- are there any uncorrected misstatements
- was risk assessment made during planning still relevant
- are there internal control deficiencies that need communicating
what are the 4 stages in the audit workflow
- pre-planning
- planning
- implementation/risk response stage
- conclusion
what is the decision made in the pre-planning stage
client acceptance or continuance
what is done in the planning phase
- risk assessment of inherent risk and decided what level of risk is acceptable
- create client risk assessment profile
- decide on whether to do a substantive of combined approach
what are 4 considerations in the conclusion stage (same as previous)
- was SAAE gathered
- are there any uncorrected misstatements
- was risk assessment made during planning still relevant
- are there internal control deficiencies that need communicating
what are the auditors goals
- obtain reasonable assurance
- obtain SAAE
- reduce audit risk to acceptably low levels
- draw reasonable conclusions to base your opinion
what are the 2 main purposes of the final analytical procedures
- useful for a final review for material misstatements or financial problems not previously noted during testing
- useful in as a final review in making sure that all adjustments that have been made are reasonable and makes sense
define provisions
uncertain liabilities as to timing and amount
when are provisions recorded (3 reasons)
- present obligation exists
- outflow of resources to resolve the obligation is probable or likely
- amount can be reliably estimated
what is the difference in provisions probability between aspe and ifrs
ASPE - requires for the provision to be likely (higher lever of certainty)
IFRS - require for the provision to be probable (more than 50% )
what is the definition of a contingent liability
it is a possible obligation that is dependent on a future event
what are the three conditions that make contingent liabilities disclosable in the F/S notes
- outcome is not probable
- outcome is not determinable
- reliable estimate of outcome cannot be made
what are 2 examples of contingent liabilities
- lawsuit filed but not decision made
- being a guarantee on the loan of another company
what are three ways to search for contingent liabilities
- inquire to management
- inspect/review meeting minutes
- inspect contracts, agreements and related correspondence
should auditors be looking for contingent liabilities
auditors should be actively searching for contingent liabilities
what is the evaluation standard of auditors for contingent liabilities
auditors must evaluate whether the contingent liabilitiy has been adequately accounted for
under aspe, if a contingent liability is unlikely to occur what should be done
no disclosure
under aspe, if a contingent liability is not determinable in terms of amount what should be done
disclosure in the footnotes
under aspe, if a contingent liability is likely to ocurr and can be reliably esetimaed what should be done
recorded in F/S
under aspe, if a contingent liability is likely to ocurr but can’t be reliably esetimaed what should be done
disclosure in footnotes
can a contingent liability turn into a provision and how
yes
over time if it becomes more probable and reliably estimatable, it should not be in the notes but should be recorded in the F/S
what are three features of commitments
- certain
- disclosed in the notes
- use similar documentation and identification proecedures as contingent liabilities
why are contingencies and commitments important to disclose
they represent potential material future burden that the company will undertake
users of F/S must be aware of all commitments
what are legal confirmations used to assess
used to assess the management assessment/estimates of possible legal costs
describe the 2 categories of lawsuits (outstanding and possible)
- outstanding (asserted) - client is notified and/or suit has already been filed
- possible (un-asserted) - client is aware of a situation that could lead to a law suit
what are the three aspect in legal confirmations being sent from client and what is listed in it
- client prepares a legal confirmation request to be sent to the legal firm(s) and gives explicing insruction that the answer should be sent to teh auditor
- in the confirmation client lists existing or potential claims that they are awar of
- law firm will either confirm or add on to the list
why is it important to analyze legal expenses on the income statement of the client (3 reasons)
- may give indication for contingent liabilities
- identifies law firms where confirmation may be required
- identifies events that may need to be confirmed by law firms
if a legal expense exists, does that mean that a lawsuit exists?
no
what is the client representation letter/management letter/letter of representative and what does it contain
it is a letter created by the management for the external auditor and signed by the management
it contains everything of relevance said by management or other employees
is it weak or strong evidence
weak, because it is just word of mouth
if management refuses to sign client representation letter, what should be done
an opinion should be refused
what does the management admit to in the mgm letter (4)
- acknowledge responsibility for fair representation in accordance to GAAP
- knowledge of known or probable non-compliance with legislation
- knowledge of known or probable illegal acts
- acknowledge responsibility to maintain I/C to prevent and detect fraud
as per CAS 560, subsequent events are events that
happened OR are found after the date of F/S (FYE)
what are the 2 types of subsequent events
1 - existed at or before FYE and need adjusting
2 - arose after FYE and need disclosing
the audit report date is the same as what date
the end of field work date
what 2 things MUST be done by the end of field work date
- legal confirmation must be received
- mgm letter must be signed
between what 2 dates are type 2 subsequent events found
between FYE (F/S date) and audit report date (end of field work)
why do type 1 subsequent events require adjusting (2)
- because they occurred before FYE
- because they have a direct effect on F/S
what is the type 1 SE relating to ar
customer with significant balance in AR goes bankrupt and thus AR must be written off
why do type 2 subsequent events require disclosure (2)
- because they occurred after FYE
- because it has no direct effect of F/S
what is the type 2 SE example with the securities
a company to which you have securities as receivable and is uninsured goes bankrupt due to a natural disaster that happened after FYE
is auditor responsible for discovering SE after after FYE
no
if auditor is made aware of SE after FYE what are they responsible for?
proper adjusting or disclosure
in terms of disclosing, if the auditor is made aware of the SE after the FYE date, what are their two options
- expand SE testing and audit reporting date up to the new SE discovery date
- restrict testing to only new SE and dual date the report
which option is preferred by auditors when they are made aware of SE after FYE
auditors would prefer the dual date method because it is less work for them
what happens if legal confirmation is not received by audit report date/end of audit work date
no opinion is issued and company may be delisted
what are 5 examples of subsequent events evidence
- notes based on discussion with management
- legal letters
- inspection of meeting minutes
- letter of representation
- cut-off testing
what should be done if auditor becomes aware of SE after F/S have been issued
ask management to withdraw statements
announce on SEDAR or EDGAR
when is going concern reviewed and for how long is the concern
it is reviewed when doing analytical procedures and it is concerned for only a year
is revaluation of materiality required at the end of the audit and why or why not
it is required because
- you need to assess whether it remains appropriate
decision must also be documented
when must materiality revaluation be done
revaluation must be done before suggesting adjustments from schedule of unadjusted items
why may materiality calculated previously change (2)
- possible sale of a division since last calculation
- change in auditors understanding of the entity
can a contingent liability turn into a provision
yes
when is a liability contingent and how does it turn into a provision
it is still a contingent liability when there is uncertainty that it will happen
it begins to turn into a provision when it becomes more probable and estimatable and then it is recorded as a provision
what is the working paper review, who should it be done by and when
general review of the working papers are done on an ongoing basis
the final review involves the paper being reviewed by the partner or manager and also all engagements require a second partner to review the papers prior to an opinion being issued
what is included in the management’s annual report
- management discussion and analysis which is forward looking on how the business will look going forward - MD&A
- financial statements
- auditor’s report
are auditors required to read the annual report and why
they are required to read it because they must ensure that it is consistent with F/S and that MD&A is consistent with the auditor’s opinion
does the auditor provide assurance on MD&A
no, they only ensure that discussion in MD&A is consistent with the F/S
when is auditor communication required with management and what mode must it be done in
communication must be done in writing regarding the following matters:
- illegal acts
- reportable internal control conditions
what are reportable internal control conditions called in US
material weakness in I/C
when auditors communicate with the company regarding illegal acts or internal control issues, who must they talk to?
management and audit committee
what are the differences between client rep letter and management letter in terms of who makes them, who is it for, and when are they due
client rep letter is from the client, to the auditor and is due at or before audit report date
management letter is from the auditor, to the management, can be done after the audit report date
what is included in the management letter and is it necessary
includes the suggestions made by auditors in for I/C improvements
this is not necessary because they are just suggestions. only comments by auditors are the ones that have material I/C issues
what are independence letters, are they still used, and when are they issued
it is a letter from auditor to the client discussing their independence which is issued before the start of the audit
is communication for I/C deficiencies required
yes, they are required in writing to those charged with governance as well as management
is the management letter required and what does it contain
the letter is optional and it contains recommendations to management and audit committee to improve business processes or controls
