SU 14: Evidence Key Considerations

Question 1

Primary source for litigation claims is

Answer 1

Client’s Management, per AU 337 management is responsible for adopting policies and procedures to identify, evaluate and account for lit claims with GAAP

Question 2

In determining the lawyer’s response to lit matters considered individually or collectively material who must have an understanding of materiality

Answer 2

The lawyer and auditor. Lawyers response to an auditor’s inquiry about litigation may be limited to those that are considered to be material to the f/s, provided the lawyer and auditor have reached an understanding of materiality (AU 337)

Question 3

The reason for request that a letter of inquiry be sent to client’s lawyer.

Answer 3

To corraborate management’s assertion about litigation

Question 4

Client is a defendant in a patent infringement lawsuit which would least likely be included in lawyer’s letter.

Answer 4

Going concern if maximum unfavorable damages are awarded. The lawyer does not have expertise to or information to make a judgement about the client’s going concern.

Question 5

Scope of an audit is NOT restricted when an attorney’s response to an auditor limits responses to

Answer 5

Matters to which the attorney has given substantive attention in the form of legal representation. AU 337 states that two limitations on the lawyer’s response will not be considered scope limitation. The response is limited to matters lawyer has give substantive attention to on behalf of the cleint. Also, if the the lawyer and auditor have come to an understanding on materiality, the response can be limited to individually or collective material items.

Question 6

Subsequent Procedures Include

Answer 6

1. ) Reading latest interim statements and comparing to stmts being reported on
2. ) Inquiring about and discussing w/mgmt various financial accounting matters
3. ) Reading BOD minutes
4. ) Obtain letters of representation from mgmt
5. ) Inquiring of legal counsel
6. ) Performing further procedures deemed necessary

Question 7

Procedures to obtain evidence about occurrence of subsequent events

Answer 7

Inquiring of legal counsel concerning lit and assessments arising after y/e. Procedures applied after the balance sheet date should include examination of data to determine that proper cutoffs have been made to evaluate assets and liabilities at bs date. The auditor should perform procedures w respect to sub events period to ascertain whether events have occurred that may require adj or disclosure essential to fair presentation of f/s (AU 560)

Question 8

Procedures performed in obtain evidence about subsequent events

Answer 8

Investigate changes in non-current debt occurring after ye. Procedures that s/b performed on or near the end of fieldwork include investigating any change in capital stock, non-current debt, and working capital. Events related to these accounts may require revision to y/e f/s or disclosure in notes

Question 9

Customer bankruptcy effecting trade receivables 10 days after BS date but 1 month before issuance. Which of the 3 should be done: F/S s/b ADJ/ Disclosure no ADJ/Modified Auditor’s report

Answer 9

Disclosure with no Adjustment
Certain subsequent events may provide additional evidence about conditions at the date of the BS and affect estimates inherent in preparation of statements. These events require adjustment to client’s f/s at y/e. Other sub events provide evidence of conditions not existing at BS date but arising subsequent affecting the interpretation of y/e f/s. These events may require disclosure but do not require ADJ. The report is unaffected.

Question 10

What are the procedures for obtaining evidence about occurrence of subsequent events (specific procedures)

Answer 10

Procedures performed at or near the end of fieldwork normally include inquiring of mgmt re: (1) whether interim statements were prepared on the same basis as statements being reported on (2) whether substantial contingent liabilities or commitments existed at the BS date (3) whether unusual ADJ were made during subsequent period (4) Whether any significant change has occurred in equity (5) current status of items that were accounted for on the basis of tentative, preliminary or inconclusive data.

Question 11

After issuance of f/s client decided to sell accounts that equate to 30% of revenue to subsidiary the auditor should?

Answer 11

Take no action because the auditor has no obligation to make further inquiries. AU 561 states “after the date of the report the auditor has no obligation to make further or continuing inquiry or perform any further auditing procedures with respect to audited f/s covered by the report unless the new information may effect the report comes to their attention.

Question 12

An event that would cause auditor to make further inquiries about after the issuance of f/s

Answer 12

New information about undisclosed lease transaction of the audited period. The auditor may become aware of information that (1) relates to prior f/s (2) was not know to them at the date of the report. (3) they would have investigated it if it had been discovered during the audit. In this case the auditor should undertake to determine if info is reliable and whether facts existed at report date. (AU 561)

Question 13

What documentation is required for audit under GAAS

Answer 13

Management representation letter (AU 333). Written representations corroborate info received orally from mgmt but do not substitute for necessary procedures to afford reasonable basis for opinion

Question 14

Types of statements in Mgmt Rep Letter

Answer 14

If applicable the list includes disclosure of guarantees whether written or oral which the entity is contingently liable.

Question 15

Which matters would an auditor not apply materiality limits to when obtaining specific mgmt reps

Answer 15

Fraud involving employees with significant roles in internal control. Management representations may be limted to matters that are considered individually or collectively material on condition that mgmt and auditor have reached an understanding of materiality. Such limits do not apply to certain reps not directly related to amounts in the f/s, e.g. acknowledgement of responsibility for fair presentation, availability of records and knowledge of fraud or suspected fraud affecting the entity involving (1) mgmt (2) employees with significant activity in internal control (3) or others if fraud could have material affect on f/s

Question 16

Which expressions would most likely be included in a mgmt rep letter of issuer

Answer 16

Confirmation of mgmt oral and written reps to auditor (1) about matters in the f/s (2) in response to specific inquiries. The auditor should obtain written rep from mgmt to indicate and document their continued validity and reduce misunderstandings. Required procedure for evidence under GAAS. Info concerning sub events common in ltr (AU 333)

Question 17

Auditing Procedures most likely to assist auditor in identifying conditions and events related to “going concern”

Answer 17

1. ) Analytical procedures
2. ) Review of subsequent events
3. ) Review of compliance and loan agreements
4. ) reading meetings minutes
5. ) Inquiry of legal counsel
6. ) Confirmation w/ related third parties of arrangement for financial support

Question 18

Auditor’s responsibility regarding “going concern”

Answer 18

After considering (1) identified conditions (2) mgmt’s plan for coping with adverse effects, the auditor may conclude there is “substantial doubt” about entity’s ability to continue as a “going concern” for a reasonable period of time. In that case the auditor should consider the possible effects on the f/s and the adequacy of disclosure. The auditor should include an explanatory paragraph in the report.

Question 19

1.) Going Concern- Restructuring existing debt to attain more favorable conditions

Answer 19

a. E, a management plan to address adverse effects of conditions or events. Restructuring debt to attain a more favorable condition is a management plan to address adverse effects of conditions or events

Question 20

2.) Going Concern Negative trends in earnings

Answer 20

a. D, A condition or event that will cause the auditor concern. Negative trends in earnings is a condition that will cause the auditor concern

Question 21

3.) Going Concern Inquiry of legal counsel

Answer 21

a. A, a procedure performed by the auditor. Inquiry of legal counsel is a procedure performed by the auditor to learn about uncertainties that could lead to going concern issues.

Question 22

4.) Going Concern Review of subsequent events

Answer 22

a. A, a procedure performed by the auditor. A review of subsequent events is a procedure performed by the auditor to learn about going concern issues.

Question 23

5.) Going Concern Resolve any substantial doubt

Answer 23

a. B, A purpose of auditor’s procedures. A purpose of the auditor’s procedures is to resolve any substantial doubt about going concern

Question 24

6.) Going Concern Delay expenditures

Answer 24

a. E, a management plan to address adverse effects of conditions or events. Delaying expenditures is a management plan to address adverse effects of conditions or events.

Question 25

7.) Going Concern Loss of key patent

Answer 25

a. D, A condition or event that will cause the auditor concern. The loss of a key patent is an event that will cause the auditor concern

Question 26

8.) Going Concern Accelerate cash receipts from affiliates

Answer 26

a. E, a management plan to address adverse effects of conditions or events. Accelerating cash receipts from affiliates is a management plan to address adverse effects of conditions or events.

Question 27

9.) Going Concern Document findings

Answer 27

a. A, a procedure performed by the auditor.

Question 28

10.) Going Concern Gathering evidence for relevant assertions about going concern

Answer 28

a. B, A purpose of auditor’s procedures. A purpose of the auditor’s procedures is to gather evidence for relevant assertions about going concern.

Question 29

1.) An accounts payable clerk misplaces year-end invoices for raw materials that were received December 21, Y 2 and therefore liabilities were not recorded.

Answer 29

a. F, investigate unmatched receiving reports dated prior to 1/1/Y3. Receiving reports should be matched with purchase orders and vendor invoices as support for payment voucher. Investigating unmatched documents would uncover the failure to prepare a voucher.
b. A, purchasing department supervisor forwards monthly listing of matched purchase orders and receiving reports to A/P supervisor for comparison with listing of vouchered invoices. Comparing and independent listing of marched POs and receiving reports with vouched invoices would detect a lost document in A/P

Question 30

2.) The company tends to be careless in recording payables in the correct period

Answer 30

a. A, from 1/Y3, cash disbursement journal, select payments and match to corresponding invoices. A cutoff test that evaluates transactions recorded at year end would detect transaction recorded in the improper period
b. I, a clerk is responsible for matching POs with receiving reports and making certain they are included in the proper month. Having an employee responsible for making certain that the transactions are recorded in the proper period would be a control to help ensure proper cutoff

Question 31

3.) The company has the same person approving pay requests and preparing checks

Answer 31

a. I, select unpaid invoice and ask to be walked through the invoice payment process. A walkthrough of the process would allow the auditor to identify weaknesses in the system
b. H, separate the functions of A/P and cash disbursements. Separation of approval and custody function is a control to mitigate risks in a payment system.

Question 32

4.) The company’s receiving department misplaces receiving reports for purchases of raw materials at year end and therefore liabilities were not recorded.

Answer 32

a. D, identify open POs and vendors’ invoices at 12/31/Y2, and investigate their disposition. To detect missing or lost receiving reports, the auditor should identify open purchase orders and vendors’ invoices at 12/31/Y2, and investigate their disposition
b. B, A/P supervisor review a monthly listing of open purchase orders and vendors’ invoices for follow up with the receiving department. A useful control would be to have the A/P supervisor review a monthly listing of open POs and vendors’ invoices for follow-up with the receiving department.