Specific Areas of Engagement Risk M4

Question 1

What are factors that would alert the Auditor to related party transactions?

Answer 1

• Making a loan with no scheduled date for repayment.
• Maintaining compensating balance arrangements for the benefit of principal stockholders.
• Borrowing funds at an interest rate significantly below prevailing market rates.
• Reading the minutes of the Board of Directors meetings to see if any material transactions were authorized.
• The accounting records should be reviewed for unusual or
  nonrecurring transactions or balances.

Question 2

What procedures would an Auditor do to assure mgmt have identified all estimates that could be material to the financial statements?

Answer 2

• Inquire of management concerning pending or threatened litigation,
• Should obtain a letter from the client’s lawyer to corroborate this information.
• Evaluating deviations from historical patterns assists an auditor in determining if a recorded estimate is reasonable.

Question 3

What should the Auditor do if mgmt refuse to accept the report modification due to a disagreement in materiality regarding specific areas on the financials?

Answer 3

• The auditor should withdraw from the engagement and contact those charged with governance in writing regarding the reasons for the audit action.

Question 4

Which small misstatements would have a significant affect on the financials?

Answer 4

• An illegal payment immaterial in amount could be material if it could lead to a material contingent liability or a material loss of revenue.

Question 5

What does an Auditor consider regarding the possibility of non-compliant laws?

Answer 5

The auditor should apply additional audit procedures.

Question 6

What would cause an Auditor to consider whether or not a client has taken acts of non-compliance and breaking the law?

Answer 6

• Being forced to discontinue operations in a foreign country
• Making Bribes are examples of noncompliance with laws and regulations.

Question 7

What Procedures would help an Auditor identify certain transactions?

Answer 7

Related Party Transactions

• Reviewing the minutes meetings of the board of directors and its committees.

Assess the Reasonableness of Account Balances

• Evaluating the reasonableness of management’s accounting estimates.

Identify a Control Deficiency

• Retesting ineffective internal control activities_ for evidence of management override.

Obtaining Evidence Regarding the Existence of Accounts Receivable.

• Sending second requests for unanswered positive confirmations_ of accounts receivable.

Question 8

Which type of estimates need to be validated to see if they are reasonable?

Answer 8

• Product warranties involve accounting estimates about both the quantity and amount of future warranty expense.
• Threatened litigation is a contingent liability that involves estimates of both the likelihood and amount of a future event.
• Income tax disputes are a potential obligation that may be incurred. Income tax disputes often involve estimates of both the probability of the outcome and the settlement amount

Question 9

What evidence can be gathered to value trade securities?

Answer 9

• Trading securities are valued at fair value.
• The valuation of trading securities is most likely obtained from quoted market prices from third-party financial services, such as NASDAQ, verified as of the balance sheet date.