Audit final

Ch 17

Procedures that extend from interim period to date of the financial statements, include both tests of controls and substantive procedures, performed following date of the financial statements and ideas is to obtain evidence through the date of the financial statements

Roll-forward procedures

Near the end of the audit, analytical procedures identify unusual or unexpected relationships not previously identified; taking last years audited numbers and this years and where there are big difference you can explain them

Final analytical procedures

An existing condition or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when some future event occurs or fails to occur

contingent liability

Examples of contingent liabilities:

pending or threatened litigation, actual or possible claims and assessments, income tax disputes, product warranties or defects, guarantees of obligations to others and agreements to repurchase receivables that have been sold

Probable and reasonably estimate =

record/adjust financial statements

Probable and not reasonably estimate =

disclose

reasonable possible and reasonable estimate =

disclsoe

Reasonably possible and not reasonably estimate =

disclose

Remote and reasonably possible -

nothing

Remote and not reasonably estimate =

nothing

The future event is likely to occur

probable

The chances of the future event occurring is more than remote but less than likely

reasonably possible

The chance of the future event occurring is slight

remote

Flow of correspondence related to the attorney letter

Auditors request client to prepare attorney letter - attorney letter - attorney letter (with responses)

Attorney letter should contain:

a list of pending or threatened litigation, claims or assessments, a description of each item including the nature of the case and management responses or intended responses to the case, an evaluation of the likelihood of an unfavorable outcome and an estimate of the range of potential loss

Auditors prepare for management to sign, provided by management to auditors, dates using date of auditor’s report (audit completion date), management taking responsible for financial statements

written representaions

What is the purpose of written representations?

impress upon management its primary responsibility for the financial statements and may establish auditors’ defense if a question related to inquiries subsequently arises

T or F

Written Representations is a required audit procedure

True

What happens if management refuses to provide a written representaion?

we will not give them an unqualified opinion; we will disclaim our opinion if they do not sign

Contents of written representations:

information related to financial statements (management’s responsibility for FS and internal control over financial reporting, appropriate disclosure, presentation and reasonableness of items, statements that uncorrected misstatements are immaterial), information provided to auditors by management, internal control over financial reporting (public entities)

Auditors are required to consider whether evidence obtained during an audit raises questions about the ability to continue as a

going concern

If there is a concern that a company will go out of business, auditors must evaluate _________

managements plans to mitigate

If an auditor looks at managements plans and believes the concerns no longer remain and the concerns will be alleviated, then

there is no effect on report or financial statements

If an auditor looks at managements plans and believes the concerns still remains and there is still substantial doubt then,

the auditor must disclose in FS and modify the audit report

Methods to evaluate materiality:

rollover method and iron curtain method

Considers the current income effects of misstatements

rollover method

Considers the aggregate effect of the adjustments on the entity’s balance sheet, in addition to current period effects we also have to look at any prior period adjustments that were weighed

Iron curtain method

____ companies can use either rollover or iron curtain method

private

____ companies have to do both rollover and iron curtain methods and if the adjustments are material for either method you have to go ahead and adjust

public

Communicate all adjustments and misstatements to _______

audit committee or individuals charged with governance

SOX and PCAOB’s documentation standard now require that firms archive their public company audit files for retention not more than _____ days after the report release date

45

Firms are required to retain audit documentation for _____ years from the date of completion of the engagements (auditor report date)

7

Period of time between end of year and the date of audit report

subsequent events

Types pf subsequent events

type 1 and type 2

Conditions existed before the balance sheet date and affect estimates that are part of the financial statements, requires adjustments of the financial statements; existed as of balance sheet date but now we have better information about the accounts

type 1 event

Conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements, requires disclosure and possible pro forma financial statements; significant events we think readers should know about

• merging, issuance of stock

Type 2 events

If we make one change this is what we would project financial statements to look like (projection based on a chnage)

pro forma

Procedures to identify subsequent events

• obtain understanding of procedures management performs to identify subsequent events

• inquire of management and those charged with governance

• read minutes of meetings of owners, management, and those charged with governance

• review entity’s interim financial statements

If facts are discovered prior to audit release date, the auditor can either

revise date of auditor’s reports to reflect new completion date or dual date auditors report (limits responsibility to a specific footnote item reference)

If facts were discovered following audit report release date, an auditor only has to act if

facts would result in revision of auditor’s report or FS and individuals are relying on FS

What does an auditor need to do if facts were discovered following audit report release and they result in a revision

auditor must notify individuals relying on the FS and issue revised FS which provide disclosure of facts; talk with management and tell them they need to restate it, if they choose not to we will withdraw our issue and issue a new one saying these financial statements cannot be relied upon

What should be communicated with individuals charged with governance?

uncorrected misstatements, significant difficulties encountered during audit, material corrected misstatements, disagreements with management. significant issues discussed with management, other findings or issues significant and relevant to those charged with governance, any misstatements, significant deficiencies, internal control deficiencies and communication with individuals charged with governance

Way to add value to the audit, not required, are prepared as a by-product of procedures performed in audit, suggestions for improvement given to management, after the audit

management letters

From auditors to client before engagement

engagement letter

from client to auditors before engagement

accpetance letter

from attorney to auditors near date of the auditor’s reports

attorney letter response

from client to auditors at date of the auditor’s reports (audit completion date)

written representations

from auditors to individuals charged with governance prior to audit report release date or within 60 days of audit report release date

internal control deficiencies

from auditors to individuals charged with governance after the audit

communications with individuals charged with governance

from auditors to client after the audit

management letter