Matters That Require Special Considerations- M7 Flashcards
What type of report to issue for the Substantial Doubt about the Ability to Continue as a Going Concern for a Reasonable period of time?
- If the entity has migating factors to alleviate that concern and disclosures are adequate, then issue Unqualified with explanatory paragraph issuer or Emphasis of the matter non-issuer. (Auditor may choose to issue a disclaimer of opinion if they choose).
- If management’s plans will not alleviate the concern and adequate disclosures were made, then issue unqualified opinion with Separate Paragraph called “Substantial Doubt about the Entity’s Ability to Continue as a Going Concern” since there is no GAAP problem, but still warranted of separate paragraph.
- Issue a disclaimer if Going Concern is unalleviated since that is a scope violation.
- Issue adverse opinion if disclosures are inadequate as it is a GAAP violation.
- An “except for” qualified opinion would be appropriate if the entity’s disclosures were inadequate but was not pervasive.
What should be included in the auditors documentation regarding a client’s ability to continue as a going concern?
- The conditions that gave rise to the substantial doubt.
- Mitigating factors considered significant.
- The auditor’s conclusion about whether substantial doubt remains or is alleviated.
- The effect of the auditor’s conclusion on the auditor’s report.
What are some of Management’s Plans that can be considered as mitigating factor for substation doubt for going concern?
- Dispose of assets
- Borrow money or restructure debt
- Reduce or delay expenditures
- Increase ownership equity
What are some internal and external factors that raise doubt about an entity’s ability to continue as a going concern?
- Internal work stoppages.
- Negative financial trends.
- An entity that is underinsured for a catastrophe.
- The bankruptcy of a key supplier and declining margins in the supplier industry.
What is the auditor required to do regarding management’s accounting estimates?
- Determine if the client’s accounting estimates are reasonable, which can be done with a comparison with industry standards.
- Verify that all material accounting estimates have been done.
- Determine that all primary estimates used by the client have been disclosed in the footnotes in accordance with GAAP.
- Evaluate the degree of uncertainty associated with the client’s accounting estimates
What are the audit procedures used to evaluate the clients estimates?
- Review subsequent events and transactions (occurring prior to completion of fieldwork) that corroborate the value of the estimate.
- Develop an independent estimate of the item for comparative purposes.
- Review and test the procedures used by management to develop the estimate.
What are the reasons to justify management using estimates?
- If data about past events cannot be accumulated in a timely, cost-effective manner, accounting estimates may be required.
- Valuation of certain historical accounts is uncertain, accounting estimates are used to more properly reflect the account balance
What are the audit procedures used to identify contingencies?
- Verify that the client reported all material contingencies in the footnotes.
- Obtain a client representation letter which would identify client contingencies.
- Review the status of long-term leases to identify possible future contingencies related to these leases.
- By discussing the sales contracts with the sales manager, the auditor may identify contingencies pertaining to the client’s future revenue recognition
Which statements would make an Auditor request more information from the Lawyer?
- The auditor would request clarification before determining that a reduction in liability is reasonable.
- When the comment is vague, without evaluation, obvious the case will not be dissmissed, it is obvious the client will not win.
