Study Unit 13 - Evidence - Key Considerations Flashcards
What is the primary source of information about litigation, claims, and assessments (LCA)?
Management is the primary source as they are responsible for adopting policies and procedures to identity, evaluate, and account for litigation, claims, and assessments (LCA).
Under U.S. GAAP, what are the accounting treatments for contingent losses?
Loss Loss not
reasonably reasonably
estimable estimable
Probable recognized disclose in notes
Reasonably Possible disclosed in disclosed in notes
notes
Remote No recognition No recognition
or disclosure or disclosure
Under U.S. GAAP, what are the accounting treatment for contingent gains?
Gain contingencies are recognized only when realized and adequately disclosed in the notes to the financial statement.
How does the timing of the existence of subsequent events affect the accounting for the events?
Subsequent events providing evidence of conditions that existed at the date of the financial statement require adjustments of the financial statement.
Subsequent events providing evidence of conditions that did not exist at the date of the financial statement may require disclosure in but not adjustments for the financial statements.
If a subsequent event occurs after the date of the auditor’s report but before the report release date, how does management’s response affect the opinion of the auditor and the dating of the report?
Management Auditor’s Report is dated at the
Response opinion
Revises FS Unmodified/ (1) Later date or
unqualified (2) duel date
Does not Modified Orginal report date
Revise FS (qualified/
adverse)
When management revises the financial statement and the auditor’s opinion on the revised statement differs from the previously expressed, how should the difference be disclosed in the auditor’s report?
The difference should be disclosed in an other-matter paragraph showing
1. The date of the auditor’s previous report
2. The type of opinion previously expressed
3. The substantive reasons for the dofferent opinion
4. That the current opinion is difference from the previous one
When should management representation letters be dated?
Management representation letters should be dated as of the date of the auditor’s report.
Identify the preparer, signatory, and addressee of the management representation letter.
Preparer - Auditors
Signatory - Responsible and knowledgeable members of management
Addressee - Auditors
What are common representations in the management representation letter?
Common representations include but are not limited to the following:
- Management is responsible for the preparation and fair presentation of financial statements
- Management has provided all relevant information and access
- Management is responsible for internal control
- Management has disclosed identified fraud and noncompliance
What is the impact on the audit report when management does not provide a representation letter regarding a management’s responsibilities in the audit process?
The auditor disclaims an opinion or withdraws from the engagement.
When does a going concern issue exist?
A going concern issue exists if it is probable that the entity will not be able to meet is obligations within 1 year after the date of the financial statements are issued or available to be issued.
What should auditors conclude on the going concern issue of an entity?
Auditors should conclude whether
1. Management’s use of the going concern basis is appropriate and
2. Substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable period of time.
When an auditor has a substantial doubt about an entity’s ability to continue as a going concern, how should the doubt be disclosed in the auditor’s report?
Audit report for nonissuers - Includes a separate section with the heading Substantial Doubt About the Entity’s Ability to Continue as a Going Concer
Audit report for issuers - Includes an explanatory paragraph
NOTE: The paragraph should include the terms “substantial doubt” and “going concern”
When an auditor has a substantial doubt about an entity’s ability to continue as a going concern, what should be documented by the auditor?
The auditor should document in the working papers
- The conditions and agents causing the substantial doubt
- The significant elements of management’s plan to overcome the problem
- The auditing procedures performed and evidence obtained
- The auditor’s conclusions about whether the substantial doubt remains, including any effects on the financial statement or disclosures and any effect on the audit report
