A4 - Forming Conclusions and Communications

What circumstances would increase the likelihood of a misstatement being considered material?

The misstatement:

1. Affects trends in profitability, masks trends, or changes a loss to income.

2. Affects compliance with loan covenants, contracts, or regulatory provisions.

3. Increases management compensation.

4. Affects significant financial statement elements.

5. Can be determined objectively.

6. Affects presentation of segments or misclassification between account balances.

7. Is significant relative to the needs of users.

8. Offsets the effects of individually significant but different misstatements.

9. Is currently immaterial but will have a material effect in the future.

10. Is costly to correct.

11. Represents a risk that possible additional undetected misstatements could affect the auditor’s evaluation.

Give examples of management bias.

• Selective correction of misstatement brought to management’s attention during the audit.

• The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor.

• Bias in the selection and application of accounting principles.

• Bias in accounting estimates.

What are the three primary purposes for obtaining written representations from management?

1. To confirm representations explicitly or implicitly given to the auditor.

2. To indicate and document the continuing appropriateness of such representations.

3. To reduce the possibility of misunderstanding concerning matters that are the subject of the representations.

What general types of items are included in a management representation letter, and who should sign it?

A management rep letter generally includes information related to:

• The FS
  The completeness of information

• Fraud

• Laws and regulations

• Uncorrected misstatements

• Litigation and claims

• Estimates

• Related party transactions

• Subsequent events

• Issues specific to a particular entity

Should be signed by the CEO, CFO, and any other members of management who are responsible for and knowledgeable about the items contained in the letter.

When is an integrated audit required?

1. For all audits of issuers

2. When an auditor is engaged to audit the internal control of a non-issuer

exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect/correct misstatements on a timely basis

control deficiency

a deficiency, or combination of deficiencies, in ICOFR that is less severe than a material weakness, yet important enough to merit attention by TCWG (responsible for oversight of the company’s financial reporting)

significant deficiency

a deficiency, or combination of deficiencies, in ICOFR, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis

material weakness

What is the auditor’s responsibility with respect to control deficiencies identified during a FSA of a nonissuer?

• The auditor has a responsibility to evaluate control deficiencies (both individually and in aggregate) identified during the audit to determine whether they represent significant deficiencies or material weaknesses.

• Control deficiencies should be communicated, either orally or in writing, to management only within 60 days of the report release date.

• Significant deficiencies and material weaknesses should be communicated, either orally or in writing, to management and TCWG within 60 days of the report release date.

• The communication with management and TCWG should be restricted use.

items are inconsequential, both individually and in the aggregate, when judged by any criteria of size, nature, or circumstance

clearly trivial

What are the additional management written representations regarding an ERISA Plan FSA?

• Management provided the auditor with the most current plan instrument for the audit period, including all plan amendments.

• Acknowledgement of its responsibility for administering the plan and determining that the plan’s transactions that are presented and disclosed in the ERISA plan FS are in conformity with the plan’s provisions, including:

  • maintaining sufficient records with respect to each of the participants to determine the benefits due, or which may become due, to such participants

• When management elects to have an ERISA Section 103(a)(3)(C) audit, acknowledgement that management’s election of ERISA Section 103(a)(3)(C) does not affect its responsibility for the FS and for determining whether:

  • an ERISA Section 103(a)(3)(C) audit is permissible under the circumstances;

  • the investment information is prepared and certified by a qualified institution;

  • the certification meets the requirements of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA (qualified institution); and

  • the certified investment information is appropriately measured, presented, and disclosed in accordance with applicable financial reporting framework.

What are the additional management written representations regarding an integrated audit?

• Acknowledgement of management’s responsibility for D&I and maintaining effective ICOFR, and states that management has performed an evaluation of the effectiveness of the entity's ICOFR

• Affirmation that management did not rely on the auditor’s procedures as the basis for their assertion

• Confirmation that all significant deficiencies and material weaknesses have been disclosed to the auditor and indicates whether any such def. identified in previous engagements remain unresolved

• A description of any fraud that resulted in a material misstatement or fraud involving a senior management or other key employees

• A statement of whether there were any significant changes to ICOFR “as of” the date of the report