CH 11 Class Notes

What is the timeline for major audit activities in audit from Beg of year and year end date (date of financial statements)?

Interim testing

What is the timeline for major audit activities in audit from year end date (date of financial statements) and date of auditors report?

Complete substantive procedures
Attorney letters
Written representations
Going-Concern assessment
Adjusting JEs
Audit documentation review
Subsequent events

What is the timeline for major audit activities in audit from date of auditors report and Audit report release date?

subsequently discovered facts

What is the timeline for major audit activities in audit from audit report release date on?

Subsequently discovered facts
Omitted audit procedures
Management letter
Communications with governance

extend work from interim period to date of the financial statements; includes both tests of controls and substantive procedures; performed following date of the financial statements; idea is to obtain evidence through year end

roll forward procedures

Study of relationships among financial and nonfinancial data

analytical procedures

analytical procedures are required during planning phase and the end of audit to:

identify unusual/unexpected relationships

For evaluating accounting estimates, what two things do you need to do?

Review management ‘s process to develop ests
Review estimates for reasonableness

Examples of reviewing estimates for reasonableness

Future CFs in eval of asset impairment
ADA
Dep

a letter of audit inquiry sent to the entity’s attorneys is the primary means of obtaining or corroborating information about litigation and pending claims

attorney letters (legal letters)

lists and describes pending litigations, claims, and assessments; attorney evaluates the likelihood of an unfavorable outcome; estimates range of potential loss; attorney provides their understanding about unasserted claims (things that could happen)

attorney letters

What are the other procedures for litigation, claims, and assessments? (5)

Inquiry of clients
Review minutes of meetings of shareholders/directors/committees
Review contracts, loan agreements, and correspondence from taxing and govt agencies
Obtain info concerning guarantees from bank confirmations
Review documentation related to legal services

What is a common analytical procedure for litigation, claims, and assessments

relationships between legal expenses

often called management rep letter

written representations

impress upon management its responsibility for the F/S; management’s written representation provided to auditors

written representation

may establish auditors defense if a question related to inquiries subsequently arises; auditor can qualify or disclaim an opinion if not provided by the client

written representation

What are the 3 types of info included in written rep

Management responsibility for F/S and IC over FR
Appropriate disclosure, presentation, reasonableness of items
Statement that uncorrected misststatements are immaterial

auditors required to consider whether evidence obtained during audit raises questions (substantial doubt) about the ability to continue as a going concern

going concern

If going concern concerns exist, evaluate management’s plans to mitigate. If concerns are resolved with management plan:

No effort on report or F/S

If going concern concerns exist, evaluate management’s plans to mitigate. If concerns are NOT resolved with management plan:

Disclose in F/S and add paragraph to auditors report

any uncorrected misstatements are carried forward for:

consideration in future

Auditor must communicate all adjustments and misstatements (corrected and uncorrected) to:

audit committee

What are the three types of audit documentation review

Audit supervisor
Audit manager and partner
Reviewing audit partner

What are the things that are done during the audit supervisor audit documentation review? Check: (3)

All steps in audit plan performed
Referencing of documentation is clear
Explanations are understandable

What are the things that are done during the audit manager and partner audit documentation review? Check: (2)

Overall scope of audit adequate
Overall conclusions support opinion

What are the things that are done during the reviewing audit partner audit documentation review? Check: (1)

Engagement quality review

is the quality of the audit work and reporting consistent with quality standards of the firm

engagement quality audit

Occur between the date of the financial statements and date of the auditors report (BEFORE audit report date)

subsequent events

become known AFTER the date of the auditor report

subsequently discovered facts

Additional evidence of conditions that existed at the balance sheet date

Type 1 event

How are Type 1 subsequent events treated?

Requires adjustment of F/S

Ex of Type ___ subsequent events: Sales R+A estimate is off based on how many people are returning after year end; warranty exp

1

Ex of Type ___ subsequent events: explosion at plant after YE date that do not effect 12/31 reporting; delay sale of business unit

2

conditions did not exist at the B/S date and do not affect the accuracy of financial statements

Type 2 event

What are the procedures for identifying subsequent events

Obtain understanding of procedures management performs to identify subsequent events
Inquire of mgmt and those charged with governance
Read those minutes of meetings of owners, mgmt and those charged with governance
Review entity’s interim financial statements
Scan unusual transactions

If discovered prior to audit report release date and after audit report date, perform procedures related to items and : (What do 2 things CAN you do)

Revise date of auditors report to reflect new completion date
Dual date auditors report (limits liability)

Following audit report release date where facts would result in revision of auditors report or F/S AND individuals are relying on F/S, then: (3)

MGMT should notify individuals
MGMT should revise F/S
IF MGMT does NOT, then auditor MUST take steps to inform

auditing that the auditor considered necessary in the circumstances existing at the time of the audit of the financial statements, but which were not perfomed

omitted audit procedures

Perform omitted procedures if they impair auditor’s ability to support a previously expressed opinion, and if individuals are currently relying on F/S and auditors report. If the previous opinion can be supported:

no further action

Perform omitted procedures if they impair auditor’s ability to support a previously expressed opinion, and if individuals are currently relying on F/S and auditors report. If the previous opinion can NOT be supported:

Withdraw original report
Issue revised report
Inform persons currently relying on F/S

What is included in communication with individuals charged with governance

Auditors’ responsibility under GAAS
Overview of planned scope and timing of audit
Judgment about quality of accounting policies, estimates, and disclosures
Significant difficulties encountered during audit
Uncorrected / corrected misstatements (both material and immaterialSignificant deficiencies and material weaknesses
Disagreements with management
Management consultations with other auditors
Significant issues discussed with management
Other findings or issues significant and relevant to those charged with governance

Is the management letter required under GAAP?

No

are prepared as a by product of procedures performed in audit; provide recommendations to client for improving effectiveness and efficiency of operations; delivered by auditors to client following audit engagement

management letters