Lec 19 Flashcards
how long does is the going concern asusmption and who is it made by
going concern relates to a period of one year of the company continuing to be in operations and is made by management
what is the auditors responsibility in relation to going concern
it is their responsibility to gather SAAE about the appropriateness of managements going concern asusmtions and if there is any material issues in this conern
if the going concern is valid, hoes does the i/s and sfp look
- i/s inc and exp are recorded normally
- sfp - PPE are recorded as cost less accum depr
if the going concern is not valid, how does the i/s and sfp look?
- i/s - no sales revenue and no depreciation
- sfp - PPE valued at net realizable value
what is net realizable value for ppe in sfp
essentially how much ppe can be sold for less the cost needed to prepare it for sale
during what part of the audit do auditors look at events or conditions regarding going concern and is it restricted to this time?
they look at it mainly during the risk assessment stage
although, it should be done throughout the entire process
t/f, the auditor shall remain alert throughout the audit for audit evidence of events that may cast significant doubt on the entitys ability to continue as going concern
obviously true you donkey look at the complicated wording
what models do auditors use as analytical procedures for risk assessment
bankruptcy prediction model
how does the bankruptcy prediction model work?
use publicly available data to estimate the probaibility of bankruptcy or classify the firm as fail or non-fail
if events or conditions have been identified that may cast significant doubt on entities ability to continue as a going concern, wha should the auditor do
- obtain SAAE to determine whether or not a material uncertainty exists
- obtain mitigating factors
what are mitigating factors
-LOC availability
- debt extensions
- reduction of dividend payment
what are the 5 procedures done for going concern
- request managment to make assessment of going conern where it has not
- evalaute the future plans and results of the plans related to mitigation of going concern
- evalaute prepared cash flow forecasts
- consider whetehr additional infomariton or facts have become available since teh managment made the assessemnet
- request written represenatation from mamangement and ask them to specify future plans and feasability of them
is going conecrn assessment relient on manament, why or why not
yes, it is because we take their word for the assessment
if mgm assessement of gc is not valid what should auditors do
expressd an adverse opinion
is mgm gc is valid but htere is material uncertainty, what is done (2 options)
- adequate disclosure is given in the form of an unmodified opinion and a seperate explaning sention in audit report (apart from emphasis of matter)
- no adequate discllsure - issue qualified or adverse opinion
if gc is valid and no material uncertainty is present hat should be done
an unmodified opnion is isseus
why is it difficult to audit going concern (3)
- the further into the future the gc is made, the more uncertanty there is
- the size, compexity of the entiy and nature of the business
- judgement about the future is made only on information available today
what reduces the auditors liability in the auditors report?
the absence of amterial uncertainty regarding gc cannot be viewed as a guarantee as to the entity’s ability to continue as a going conern
when are accounting estimates requered
required by mgm when monetary amounts cannot be directly observed
what is the process in making acoutning estiamtes
select and apply a method using assumtions and data by applying judgemnent which makes the estiamtes complex to measure
what are 7 examples of accounting estimate
- PPE depreciation
- vlaution of infrastrcutere
- valuation of finanacial instriment
- outcome of pending litigation
- warranty obligations
- revenue recognitionn for long-lived contracts
- inventory obselescenes
what are hte 3 most complex accoutning estiamtes
- financial instruments
- gw impairment
- pension (actuarial) liabilities
what estimation model evaluates gw?
business valuation of variables, such as timing of cashflows, growth, discounts
what estimation model is used for evaluation pensions
actuarial paramenters such as survival rates, attrition rates
what estimation model is used for evaluation financial instruments
volatilities
what is the objective of the auditor in relation to SAAE of accounting estimates
obtain SAAE about whether accounting estiamtes and related disclosures in the finacial statments are REASONABLE in the context of the applicable finacial frmaork
why is reasonableness defined so loosely and generally
because there is struggle with accouting estimates
why is assessing accounting estimates inherently dificult? (3)
- inherent difficulty in deveopin the estimate (high uncertainty)
- lack of technical expertise by management
- deliberate manamgenet bias
the determination of what can go wrong in developing estimates
inputs
what is the auditors point estimate or auditors range
an amount, or range of amounts developed by the auditor to evaluate managements point estimate
what is management point estimate
amount selected by management for recognition or disclosure in the F/S as an accoutning estimte
the outcome of an accounting estimate refers to what
the actual monetary amount that results from the resolution of the transaction
can all complex accounting estimates be observed?
no, some are imposible thus subsequesnt evidence does not work
when assessing risk of estimates made and how to proceed, what 2 considerations should be made by the auditor?
- the likelihood that an estimation is subject to estimation uncertainty
- the degree to which the estimate is affected by complexity, subjectivity, and other inherent risk factors
what are the 3 procedures in response to risk of material misstatement
- obtain audit evidence from events occurring up to the date of the auditor’s report
- test how the management made the accounting estimate
- develop an auditor’s point estimate
developing an auditor’s point estimate creates issues with independence and self review threat, how can this be resolved
instated of putting own numbers, will coach management team on how to come up wit the same material number
when do auditors decide to design and perform tests for the operating effectiveness of controls (2)
- the assessment of risk of material misstatement at assertion level includes an expectation that the controls are operating effectively
- substantive procedures alone cannot provide sufficient audit evidence
what 2 individuals might controls for accounting estimates be tested by?
- high placed management
- specialists
most likely, audit of complex estimates are pure sub OR combined? and give 3 examples of what might these estimate be
most frequently, they are pure substantive
- gw
- actuarial
- financial instruments
what are the specialists used for pension liabilities, goodwill impairment, and financial instruments?
actuaries, CBVs, CFAs
what is the emphasis of matter paragraph?
paragraph included in the auditors report that refers to a matter that has been appropriately presented or disclosed in the F/S that the auditor believes is fundamental in understanding the F/S
what information does the emphasis of matter paragraph relate to?
refers to information presented in the financial statements
what are 4 examples of the emphasis of maters that might cause a paragraph to be written
- uncertainty related to the future outcome of exceptional litigation
- significant subsequent events that occur between the date of the F/S and date of auditors report
- application of new accoutning policy
- major catastrophe that has had major consequences on the entity’s financial position
what is the other matters paragraph
paragraph included that refers to a matter other than those presented in the F/S, that is relevant to user’s understanding
what information does the other matters paragraph refer to
other information included in the F/S such as MD&A and comparative information from other periods
what are 4 examples of other matters paragraph reasons
- the statement is relevant to user’s understanding of audit
- statement is relevant to user’s understanding of AUDITOR’S responsibities
- reporting on more than one set of financial statements (may report in diff countries because they are cross listed)
- there is restricitions imposed on the distribution of the auditors report
what report does the statement that the F/S were audited by another auditor who expressed an unmodified opinion in the previous year?
the Other Matters Paragraph
