Auditing - Ch. 17 - Completing The Audit Engagement

Front 1

What does SAS 85 (Management Representations) require?

Back 1

Auditors must obtain management representations on matters of audit importance.

Front 2

What is required in the management representations of SAS 85?

Back 2

Must be:
- Written
- Addressed to the auditor
- Signed by the client's officers (CEO, CFO - normally)

Front 3

When is the representation letter dated?

Back 3

The same date as the auditor's report: THE AUDIT COMPLETION DATE

Front 4

What are the purposes of the management representation letter?

Back 4

1. Impress upon management its primary responsibility for the financial statements
2. May establish auditors' defense if a question related to inquiries subsequently arises

Front 5

What must be done if the client does not provide a representation letter?

Back 5

Results in a SCOPE LIMITATION that is sufficient to preclude an UNQUALIFIED OPINION and is ordinarily sufficient to cause an auditor to DISCLAIM AN OPINION or WITHDRAW FROM THE ENGAGEMENT.

Front 6

Reps rel to I/C: If client is subject to reqts of AS 5, what is included in additional representations?

Back 6

- Management has PERFORMED AN ASSESSMENT OF I/C
- Management's conclusion with respect to the operating effectiveness of its I/C
- No subsequent changes in I/C that significantly affect I/C
- No control deficiencies from prior engagements have not been properly resolved

Front 7

What is the primary reason auditors request responses to attorney letters?

Back 7

To provide auditors corroboration of the information furnished by management about litigation, claims, and assessments.

Front 8

What is NOT required under generally accepted auditing standards?

Back 8

Management Letters

Front 9

What is a Type I event in subsequent events?

Back 9

Events that HAVE BEEN KNOWN FOR A WHILE. 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.

Front 10

What do you do with the Type I event?

Back 10

ADJUST THE FINANCIAL STATEMENTS and/or DISCLOSURES to reflect new information (if material)

Front 11

Give examples of Type I events.

Back 11

- Loss on uncollectable receivable due to customer's bankruptcy
- Settlement of litigation for an amount different from that previously recorded (if litigation was pending at balance sheet due date)

Front 12

What is a Type II event in subsequent events?

Back 12

UNFORSEEN EVENTS. Events that provide evidence about conditions that did not exist at the balance sheet date but that arose subsequent to that date.

Front 13

What do you do with the Type II event?

Back 13

- Disclose in financial statements (if material)
- Prepare pro forma financial statements (if VERY material) - present as if even had happened at beginning of period

Front 14

Give examples of Type II events.

Back 14

- Loss on an uncollectable receivable IF customer suffers post-balance sheet loss due to flood or fire
- Bond or capital stock issuance
- Loss of plant or inventory as a result of flood or fire
- Purchase or Disposal of a business segment

Front 15

What are audit procedures if events are found Prior to audit completion date?

Back 15

Perform audit procedures and ensure proper accounting treatment and disclosure.

Front 16

What are audit procedures if events are found following the audit completion date and Prior to audit report release date?

Back 16

1. Dual date audit report...... OR
2. Extend audit report date
(Dual dating is used to limit auditor's legal liability) If you extend the report date, then you're responsible for the info.

Front 17

What are audit procedures if events are found following audit report release date?

Back 17

Subsequent Discovery of Facts

Front 18

Who signs off on the Audit Documentation Review and When does this occur?

Back 18

Occurs BEFORE the Audit Completion date
1. Audit Supervisor
2. Audit manager and partner
3. Reviewing partner (outside the engagement team)

Front 19

What are the audit documentation requirements for Public companies (AS 5) ?

Back 19

- Documentation completion date must be WITHIN 45 DAYS OF REPORT RELEASE DATE.
- Must retain documentation for 7 YEARS

Front 20

What are the audit documentation requirements for Non-Public companies (SAS 103)?

Back 20

- Documentation completion date must be WITHIN 60 DAYS OF REPORT RELEASE DATE.
- Must retain documentation for 5 YEARS

Front 21

What are the activities following the Audit Report Release Date?

Back 21

- Subsequent discovery of facts
- Omitted procedures
- Communication with audit committee (or those charged with governance)
- Management letters

Front 22

What are Subsequent Discovery of Facts?

Back 22

These are facts found subsequent (after) to the AUDIT REPORT RELEASE DATE, the auditor may become aware of facts that existed at the audit report date which might have affected the report had the auditor known about them.

Front 23

In what cases do you require disclosure of events?

Back 23

1. Facts are reliable and existed at report date
2. Facts affect financial statements and auditors' reports
3. Persons are containing to rely on financial statements and auditors' reports

Front 24

What does an auditor do if client refuses to disclose?

Back 24

Auditors should inform board that he/she will notify regulatory agencies (SEC) and others relying on the reports.

Front 25

What is a Going Concern Evaluation? (SAS 59) [you think it might be going bankrupt]

Back 25

Limits auditors' responsibility for evaluating the client's ability to continue as a going concern to a period of time not to exceed ONE YEAR beyond the date of the financial statements under audits.

Front 26

What are the indicators in a Going Concern Evaluation?

Back 26

- Negative trends in operating income
- Working capital deficiencies
- Loss of key patent
- Default on loan
- Restructuring of debt
- Changes in dividend policy
- Work stoppages

Front 27

How do you identify a subsequent event?

Back 27

1. Review latest interim financial statements
2. Make inquiries of officers and other executives (Contingent liabilities or commitments AND Significant changes in capital stock, long-term debt, or working capital)
3. Read minutes of meetings of shareholders, directors, and committees
4. Obtain responses to attorney letters
5. Obtain management representations

Front 28

What is required of auditors in evaluating materiality? (SAS 108)

Back 28

Requires auditors to EVALUATE IDENTIFIED MISSTATEMENTS using BOTH of the following methods:
1. ROLLOVER METHOD = considers the current period income effect(s) of misstatements
2. IRON CURTAIN METHOD =
considers the aggregate effect of the adjustments on the entity's balance sheet
(SAS 108 requires ADJUSTMENTS TO BE PROPOSED if material under either approach)

Front 29

What is required of auditors under SAS 114 in adjusting journal entries when evaluating materiality?

Back 29

SAS 114 requires that auditors COMMUNICATE (TO THE AUDIT COMMITTEE) all adjustments and misstatements detected during the audit (regardless of materiality)
(REMEMBER that a material error, which requires an adjusting journal entry) is a strong indicator that a material weakness exists)

Front 30

How are omitted procedures identified?

Back 30

Through EXTERNAL REVIEW PROCEDURES (e.g., peer reviews, PCAOB reviews)

Front 31

When should auditors perform omitted procedures?

Back 31

- If additional testing CANNOT BE USED TO SUBSTITUTE for the omitted procedures
- if omitted procedures ARE IMPORTANT in supporting the opinion
- if individuals are CURRENTLY RELYING ON F/S AND AUDITORS' REPORTS

Front 32

In omitted procedures, what happens if previous opinion can be supported after performing the procedures?

Back 32

No further action necessary

Front 33

If omitted procedures are performed, if previous opinion cannot be supported, what happens?

Back 33

- Withdraw the original report
- Issue revised reports
- Inform persons currently relying on the financial statements

Front 34

Are Management letters requried under GAAS?

Back 34

NO

Front 35

Why are management letters prepared?

Back 35

Are prepared as a by-product of procedures performed in audit.

Front 36

What do management letters provide?

Back 36

They provide RECOMMENDATIONS TO CLIENT for improving EFFECTIVENESS AND EFFICIENCY of operations

Front 37

Who are management letters delivered to and When?

Back 37

Delivered BY AUDITORS to CLIENT .... AFTER AUDIT ENGAGEMENT

Front 38

Define CONTINGENCIES.

Back 38

States that when a contingent liability exists, the likelihood that the future event will result in a loss is to be assessed using three categories:
1. Probable
2. Reasonable possible.
3. Remote.

Front 39

Define Contingent liability.

Back 39

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.

Front 40

What is the Audit Completion Date?

Back 40

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.
(Also the OPINION DATE - date on the auditor's report)

Front 41

What is the Audit Report Release Date?

Back 41

Date on which auditors ALLOW THE CLIENT TO USE THE AUDITORS' REPORT -- for large accelerated filers, MUST BE WITHIN 60 DAYS OF FISCAL YEAR-END

Front 42

What does GAAP require of material contingencies?

Back 42

To be PROPERLY ACCOUNTED FOR AND DISCLOSED

Front 43

What type of contingency are auditors more concerned about?

Back 43

LOSS CONTINGENCIES because they have a negative impact on financial results. Examples are:
- Warranty liabilities
- IRS tax disputes
- Pending or threatened litigation

Front 44

What are the sources of information in Contingencies?

Back 44

1. Search for UNRECORDED LIABILITIES
2. LEGAL LETTERS
3. INQUIRY OF CLIENTS
4. REVIEW MINUTES OF MEETINGS OF STOCKHOLDERS, DIRECTORS, AND COMMITTEES
5. REVIEW CONTRACTS, loan agreements, and correspondence from tax and gov't agencies
6. OBTAIN INFO about guarantees from bank conformations
7. REVIEW DOCUMENTATION related to LEGAL SERVICES

Front 45

What is the purpose of the LEGAL LETTER?

Back 45

CORROBORATE ORAL REPRESENTATIONS made to the auditor and to DOCUMENT THE CONTINUED APPROPRIATENESS of those representations. Also reduces the possibility of misunderstanding between management and the auditor.

Front 46

What is the auditor's responsibility in a legal letter?

Back 46

TO INITIATE REQUEST FOR ATTORNEY LETTER

Front 47

What does an auditor need to do if a lawyer refuses to respond to a Legal Letter?

Back 47

Auditor should CONSIDER THE REFUSAL A SCOPE LIMITATION

Front 48

What is the general contents of a management representation letter?

Back 48

Anything that has been told to the auditor or given to the auditor in writing regarding the financial statements and internal control of the entity.

Front 49

What is the purpose of Dual Dating of Audit reports?

Back 49

Dual dating an audit report provides a means of inserting important information in the financial statements and footnote disclosures learned by the auditor after the last day of fieldwork. A significant advantage of dual dating the report is that the auditor’s liability for events after the last day of fieldwork is limited to the event specifically identified in the report date.

Front 50

What are the implications of dual dating for auditors' responsibilities?

Back 50

The auditor is responsible for whatever date they put down.

Front 51

What are the purposes of Audit Documentation Review (at various levels of review)?

Back 51

1. Audit supervisor - makes sure that all steps of audit have been performed and everything in the documentation is clear and understandable
2. Audit manager and partner - makes sure that the overall scope of audit is adequate and that conclusions support the opinion
3. Reviewing partner (outside the engagement team) - makes sure the quality of auditing work and reporting are consistent with quality standards of the firm.

Front 52

What is Subsequent Discovery of Facts?

Back 52

Information that the auditor became aware of AFTER THE AUDIT REPORT RELEASE DATE which might have affected the report had the auditor known about them.

Front 53

How should auditors respond to Subsequent Discovery of Facts?

Back 53

Must REQUIRE DISCLOSURE OF EVENTS IF:
1. Facts are reliable and existed at REPORT DATE
2. Facts affect FINANCIAL STATEMENTS and AUDITORS' REPORTS
3. Persons are continuing to rely on FINANCIAL STATEMENTS AND AUDITORS' REPORTS

Front 54

How should auditors respond to Discovery of Omitted Audit Procedures if it is determined that certain audit procedures have not been performed?

Back 54

These are typically identified through the EXTERNAL REVIEW PROCESS (peer reviews, PCAOB reviews)
If omitted procedures have been performed and if previous opinion cannot be supported, then:
- WITHDRAW THE ORIGINAL REPORT
- ISSUE REVISED REPORTS
- INFORM PERSONS currently relying on the FINANCIAL STMTS

Front 55

What if client refuses disclosure in a Subsequent Discovery of Facts?

Back 55

Auditors should INFORM BOARD THAT HE/SHE WILL NOTIFY REGULATORY AGENCIES (SEC) and others relying on the reports