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32 Cards in this Set
- Front
- Back
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Knowthe important dates in the audit completion process and how they relate tocontingencies, subsequent events, subsequent discovery of facts, etc.
Audit completion date |
audit completion date- date when auditors have gathered sufficient appropriate evidence on which to base their opinion, this includes the review of audit documentation, preparation of the F/S and related disclosures, and obtaining management representations
this is also the opinion date ( date on the auditors report) know key dates in the audit process graph |
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audit report release date
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date on which the auditors allow the client to use the auditors repost. F/S due dates
large accelerated filers ( 700 million market cap) - due within 60 days of fiscal year end accelerated filers ( 75 million)- due within 75 days of fiscal year end non accelerated filers- due within 90 days of fiscal year end |
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Contingencies– Definition, information sources, situational disclosure/accounting rules
contingent liabilities definition |
a contingent liability is defined as an existing condition or set of circumstances involving uncertainty about a possible loss that will ultimately be resolved when some future event occurs or fails to occur
two main types legal contingencies committments |
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contingent liabilities
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GAAP requires al material contingencies to be properly accounted for and disclosed
FASB ASC topic 450- when a contingent liability exists, the likelihood that the future event will result in a loss it be assessed using three categories |
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three categories used to assess the likelihood that the future event will result in a loss
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probable- the future event is likely to occur
reasonably possible- the change of the future event occurring is more than remote but less than likely remote- the change of the future event occurring is slight |
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review of contingent liabilities
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if the event is probably and the amount of the loss can be reasonably estimated: accrue the loss
if the event is only reasonably possible or the event is probably but the amount of the loss cannot be estimated: discuss in the footnotes if the event is remote: do not accrue, do not discuss in the footnotes |
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contingent liabilities sources of information
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search for unrecorded liabilities
review documentation related to legal services legal letters inquiry of clients review minutes of meetings of stockholders, directors, and committees review contracts, loan agreements, and correspondence from taxing and governmental agencies obtain information concerning guarantees from bank confirmations |
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commitments contingencies
examples |
long term contract to purchase raw materials at a fixed price
long term contract to sell products at a fixed price |
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implications
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in most cases, commitments should be disclosed in the footnotes
in some cases, the entity may have to record a loss on long term commitment even though there has been no exchange of goods |
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commitment scenario
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southwest airlines enters a long term commitment to purchase jet fuel prior to their fiscal year end. the contacted price is 6.00 per gallon
if the price of jet fuel is more than 6.00 per gallon at fiscal year end: disclosure is required if the price of jet fuel is less than 6.00 at fiscal year end: recognize a loss on the commitment at year end ( assuming amount is material) |
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Legal Letters - Process, purpose, auditors response when lawyers refuseto respond
purpose |
corroborate information about litigation, claims, and assessments that the client has provided
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legal letters responsibilities
auditors |
initiate request for attorney letter
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client
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prepare listing, description, and evaluation of litigation, claims, and assessments for letter.
send letter to attorney on auditor's behalf- sent by client so that attorney is aware that client has waived attorney-client privilege |
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attorney
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respond directly to auditors regarding clients description of litigation, claims, and assessments contained in attorney letter
if a lawyer refuses to respond, auditors should consider the refusal a scope of limitation |
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ManagementRepresentation Letters – primary purpose, date of the letter, general contentsof the letter, what auditors should do if the client does not sign the letter -what are the two possible opinion types (and which of the two is most common)
primary purpose |
* impress upon management its primary responsibility for the financial statements*
corroborate significant oral representations made to the auditor and document the continued appropriateness of those representations may establish auditors' defense if a question related to these inquiries subsequently arises |
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Date of the letter
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the representation letter ( rep letter) is dated on the same date as the auditor's report: the audit completion date
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general contents of the letter
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SAS 85 requires that auditors obtain management representation on matters of audit importance. the representations are written, addressed to the auditor, and signed by the client's officers
the following representations are required without regard to materiality -management responsibility for the fairness of the financial statements -availability ( to the auditor) of all financial records and data -management responsibility for the design and implementation of programs and controls related to fraud -disclosure of significant deficients in internal control -information concerning fraud involving the client |
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what auditors should do if client doesn't sign the letter
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auditors should qualify or disclaim an opinion if not received from the client
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two possible opinion types and which is most common
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qualify or disclaim
ordinarily sufficient to cause an auditor to disclaim an opinion or withdraw from the engagement |
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Subsequentevents – what are subsequent events and when do they occur, typical auditprocedures used to identify subsequent events, types of subsequent events (TypeI and II), how auditors should respond to a subsequent event depending on thecircumstances (e.g., when the event was discovered, whether the event affectsaudited balances, etc.).
identification of subsequent events |
-review latest interim financial statements
-inquire of officers and other executives: --contingent liabilities --significant changes in capital stock, long term debt, or working capital -read minutes of meetings of shareholders, directors, and committees. -obtain responses to legal letters -obtain management representations |
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audit procedures depend on the timing of subsequent events identification
prior to audit completion date |
-prior to audit completion date:
--perform audit procedures and ensure proper accounting treatment and disclosure |
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following audit completion date but prior to audit repot release date ( dual dating issue)
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-dual date audit report or extend audit report date
-dual dating is used to limit auditors legal liability (original date of audit report plus date of subsequent event) |
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following audit report release date
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"subsequent discover of facts"
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types of subsequent events
type I |
type I- events that provide additional evidence about conditions that existed at the balance sheet date and affect the estimates that are part of the financial statement preparation process
- adjust financial statements and disclosures to reflect net information ( if material) --examples -uncollectible account receivable existing at year end resulting from continued deterioration go a customer's financial condition leading to bankruptcy after the balance sheet date -settlement of litigation after the balance sheet date for an amount different from that previously recorded ( the litigation was pending at balance sheet date) |
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type II subsequent events
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type II: events that provide evidence about conditions that did not exist at the balance sheet date but the arose subsequent to that date
-disclose in financial statements ( if material). we do not adjust the F/S -prepare pro forma financial statements ( if " very material") - presentation of financial information "as if" the event had occurred as of the beginning of the period ---examples -purchase or disposal of a business segment -bond or capital stock issuance -loss of the entity's manufacturing facility or assets resulting from a casualty loss such as fire or flood -losses on receivables caused by conditions such as business failure arising subsequent to the balance sheet date |
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DualDating of Audit Reports: circumstances in which this is done, implications ofdual dating for auditors’ responsibilities
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-following audit completion date but prior to audit report release date ( dual dating issue) - dual date audit report or extend audit report date-dual dating is used to limit the auditor's legal liability (original date of audit report plus date of subsequent event) *from book* the auditor's report is dual dated when a subsequent event occurs after the date on which the auditor has obtained sufficient appropriate audit evidence but before the financial statements are issued |
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Purposesof audit documentation review (at the various levels of review)
audit supervisor |
-have all steps in audit program been performed?
-is referencing among documentation clear? - are explanation understandable? -first standard of fieldwork ( planning and supervision) |
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audit manager and partner
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-is the overall scope of the audit adequate?
-do overall conclusions support the opinion? |
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independent engagement quality review
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-performed by a partner who is not otherwise associated with the engagement: is the quality of audit work and reporting consistent with quality standards of the firm?
NOTE -review must always be performed by staff at least a level higher |
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Subsequentdiscovery of facts – what are they and how should auditors respond
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subsequent to the audit report release date, the auditor may become aware of acts that existed at the audit report date which might have affected the report had the auditor known about them.
if: -the facts are reliable and existed at the audit report date and -the financial statements require revision ( so the audit report is affected) -the auditor should request the client to issue an immediate revision to the financial statements. the reason for the revision should be described in the footnotes of the revised financial statements -if the effect on the financial statements cannot immediately be determined, the client should notify persons known to be relying on the financial statements and auditors report ( SEC, stock exchanges, etc..) |
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if client refuses to cooperate
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if client refuses to cooperate and make the necessary disclosures, the auditor should inform the board of directors and
- notify the client that the auditor's report must no longer be associated with the financial statements -notify regulatory agencies with jurisdiction over the client that the auditor's report can no longer be relied upon -notify each person known to the auditor to be relying on the financial statements ( in general, for public clients, notification to the SEC is sufficient) |
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Discoveryof omitted audit procedures – how should auditors respond if it is determinedthat certain audit procedures have not been performed
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-these are typically identified through the external review process ( peer review, PCAOB reviews)
-auditors should perform the omitted procedures if: --additional testing already performed cannot substitute from he committed procedures --the omitted procedures are important in supporting the opinion ( the opinion cannot be supported without them) --individuals are currently relying on F/S and auditor's report. - if previous opinion can be supported after performing the procedures, no further action necessary -if previous opinion cannot be supported: --withdraw the original report. --issue revised reports -inform persons currently relying on the financial statements |
