Chapter 11 - Completing the Audit

What is interim testing?

Testing that occurs between the beginning of the year and the year-end date under audit AKA date of the financial statements

What is the date of the auditors report? What is another name for this report?

The point at which auditors will have gathered sufficient, appropriate evidence on which to base their opinions on the financial statements and internal control over financial reporting.

Audit completion date

What is the audit report release date?

The date on which auditors allow the client to use the auditor’s reports in conjunction with the financial statements

What are roll-forward procedures?

Procedures performed by auditors to extend the conclusions from an interim date to the date of the financial statements

What are the three use cases for analytical procedures and are they required?

1. During planning - required

2. As part of substantive testing - optional

3. At the end of the audit - required

What is earnings management?

When accounts are adjusted to meet analyst earnings expectations

Can auditors audit, corroborate, or verify accounting estimates?

No

How do auditors test accounting estimates?

Auditors test the reasonableness of accounting estimates to ensure they make sense and are reasonable for the provided circumstances

Do all material contingencies need to be properly accounted for and disclosed in the financial statements for them to be in compliance with GAAP?

Yes

What is a contingency?

An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur

What is an auditors job with respect to contingencies?

1. All contingencies should have been appropriately identified

2. Any client disclosure of contingencies should reflect the most current information and all recent developments whether its favorable or unfavorable to the client

Should auditors inquire of management to discuss potential litigation, claims, and assessments?

Yes

What is an attorney letter?

A communication prepared by the client but sent by the auditors to the clients attorneys that details all pending litigation, claims, and assessments against the client and that request the attorneys to comment on these matters directly to the client’s auditors

Why is it important the client send the attorney letter to its attorneys and not the auditor?

Ir informs the attorney that the client is waiving the attorney-client privilege and is authorizing the attorney to provide information to auditors.

What are the three steps of the attorney letter?

Step 1: Auditors request the client to prepare a letter to its attorneys

Step 2: The attorney receives the letter mailed by the auditor

Step 3: The attorneys response is provided directly to the auditors for purposes of control

What is an unasserted claim?

Represents no formal lawsuit or claim has been filed or threatened on behalf of others but that circumstances such as a catastrophe, accident, or other physical occurrence could result in a suit or claim.

When should unasserted claims be disclosed?

When the assertion of a claim is probable

Are written representations required?

Yes

What are written representations?

A written assertion provided by management to auditors related to financial statements. asserts the information provided and management internal control over financial reporting.

What form do written representations take?

A letter on the client’s letterhead addressed to auditors and signed by officers.

What date are written representations dated as of?

The date of the auditors reports

Is management refusing to provide written representations a scope limitation? If so what does this typically result in?

Yes, an engagement withdraw or qualified opinion

Are auditors required to consider whether any evidence that comes to their attention during the examination provides substantial doubt about the client’s ability to continue as a going concern for a reasonable period of time?

Yes

Are auditors required to ask management about events or conditions beyond the period of evaluation that may affect the entity’s ability to continue as a going concern?

Yes

What should auditors do if their evaluation suggests going-concern uncertainties?

Auditors should obtain information about management’s plans to mitigate the effect of these factors and assess the likelihood that these plans can be effectively implemented

Who’s responsibility are the financial statements and their accompanying footnotes?

Managemnet’s

Who’s responsibility is it to adjust the financial statements in the case of misstatement?

Managemnet’s

What is an uncorrected misstatement? For what reason would a misstatement not be corrected?

A misstatement that auditors have identified and accumulated during the audit that management has not corrected. Materiality and cost/benefit considerations.

What are the two methods of evaluating the materiality of uncorrected misstatements

1. The rollover method

2. The iron curtain method

What is the rollover method?

A method of evaluating uncorrected misstatements that only considers the current period effects.

What is the iron-curtain method?

A method of evaluating uncorrected misstatements that considers all cumulative effects

Are auditors required to use both methods?

Yes

Who do auditors communicate all nontrivial misstatements detected to? Should these be communicated regardless of their effect on the financial statements?

The client’s audit committee. Yes

Does GAAS require audit documentation to be reviewed by another person who has not been involved with the audit?

Yes

What is the purpose of an engagement quality review?

Ensures the quality of audit work

What are the four benefits provided to the firm by the use of engagement quality review?

1. The review ensures the audit is conducted in compliance with GAAS

2. Allows the firm to assess the overall quality of the firms audit practices

3. Serves as an important component of the training and evaluation of staff members

4. Allows the firm to adhere to the performance principle

What is a subsequent event?

Events occurring between the date of the financial statements and the date of the auditors report

What is the auditors job in regard to subsequent events?

Ensure any material events that affect the fairness of the financial statements and disclosures are properly identified and disclosed.

What are the two types of subsequent events?

1. Events that provide additional evidence about conditions that existed at the time of the financial statements

2. Events that provide evidence of conditions that arose following the date of the financial statements

What are the four procedures that should be performed specifically to determine whether material subsequent events exist?

1. Obtain an understanding of procedures management performed to identify subsequent events

2. Inquire of management and governance

3. Read minutes of meetings

4. Review the entity’s latest interim financial statements

What are subsequently discovered facts?

Information that becomes known to auditors after the date of their report, which had it been known at that time, would have caused auditors to revise their report

What is typically done when facts are discovered after the audit report date but before the release date?

The auditors dual date the report

What happens if auditors become aware of events after the release of the financial statements and auditors report? What if management refuses to take these two steps?

If these facts would result in a financial statement revision the client should notify individuals relying on the financial statements they cannot rely on them and release a revised copy as soon as possible.

The auditors should notify users that the auditors report cannot be relied upon

What are omitted procedures?

Auditors failed to complete necessary procedures prior to the audit report release date

When are all written internal control deficiencies and material weaknesses required to be communicated to those charged with governance for issuers and noneissuers?

1. Issuers - prior to the audit report release date

2. Non-issuers - no later than 60 days following the audit report release date

Do previous uncorrected material weaknesses need to be communicated again if they are not corrected by the next audit?

Yes

What is the purpose of the management letter?

It is a communication that provides a summary of auditors’ recommendations resulting from the audit engagement that allows the client to improve the effectiveness and efficiency of its operations.

Are management letters required by generally accepted auditing standards?

No