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53 Cards in this Set
- Front
- Back
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Known misstatement |
Misstatement that has been specifically identified and about which there is no doubt; a.k.a. factual misstatement |
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Projected misstatement |
Misstatement that is the auditor's best estimate of the misstatement in a given population and that is a projection of the misstatements identified in an audit sample to the entire population from which the sample is drawn |
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Judgmental misstatement |
Misstatement that arises from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or the the selection or application of accounting policies that the auditor considers inappropriate |
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Should misstatements that are individually not material be forgotten? |
No |
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Which misstatements may be waived? |
Those that are immaterial. |
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The materiality of a misstatement is based on both: |
the quantitative amountand qualitative of the the misstatement |
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Contingent |
Not known for sure |
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Probability of outcomes for losses |
1. Probable 2. Reasonably possible 3. Remote |
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ASC 450 requires the disclosure of contingent losses that can be both.... |
reasonably estimated and that are probable |
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ASC 450 also requires the disclosure of a contingent loss if there is at least... |
a reasonable possibility that a loss may have been incurred and either an accrual has not been made or an exposure exists that is greater than the amount accrued |
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Examples of contingent liabilities include: |
1.Litigation 2. Warranty liability 3. Guarantee of debt of others 4. Purchase/ sale commitments 5. Environmental/regulatory
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What is management's responsibility in regards to contingencies? |
They are responsible for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies
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What are auditors' responsibilities in regards to contingencies? |
They are responsible for determining that the client has properly identified, accounted for, and disclosed material contingencies |
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What is the primary source of evidence concerning contingencies? |
The client's management |
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What should the auditor obtain from management concerning contingencies? |
1. Description & evaluation of contingencies that existed at the balance sheet date or that arose prior to the end of the fieldwork (Inquiry of managements) 2. Letter of audit inquiry/ legal representation letter 3. Board of Director minutes 4. Purchase/sale contracts 5. Regulatory reports |
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What is the primary source of corroborative evidence concerning litigation, claims, and assessments? |
The client's legal counsel |
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What should the auditor ask the client to send to legal counsel? |
A letter of audit inquiry |
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Letter of audit inquiry |
Asks a client's legal counsel to confirm information about asserted claims and those claims that are probable of assertion |
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The American Bar Association and the AICPA have agreed that the letter of audit inquiry should include the following: |
1. Identification of the company, its subsidiaries, and the date of the audit 2. Management's list that describes and evaluates the contingencies to which the lawyer has devoted substantial attention 3. Request that the lawyer furnish the auditor with the following: p. 627
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Legal counsel should be instructed by the client to respond directly to... |
the auditors |
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What happens if a lawyer refuses to furnish the requested information? |
A scope limitation occurs and an auditor would be unable to issue an unqualified audit opinion |
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Events or transactions occurring _____ the balance sheet date, but _____ the audit report date, can be useful in identifying and evaluating the reasonableness of estimates. |
after, before |
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What are examples of events or transactions that take place after the balance sheet date, but before the audit report date? |
1. Collection of receivables 2. Sale of inventory or financial instruments 3. Purchase of inventory under a purchase commitment for which an estimated loss was or should have been accrued |
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Noncompliance
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"acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations"
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Can auditors resolve matters of noncompliance? If not, who can? |
No. Legal authorities.
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Is an audit opinion a guarantee that a business is a going concern? |
No
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What are auditors required to do in regards to a going concern?
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They are required to evaluate the likelihood of each client continuing as a going concern for a reasonable period of time |
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What is the going-concern evaluation based on? |
Information obtained from normal audit procedures performed to test management's assertions |
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Indicators of potential going-concern problems |
-cash flow projections/ recurring losses from operating activities -debt default (debt restructuring/waiver) -inadequate financing -pending litigation -loss of principal customer/contract -employee strikes -loss of a patent |
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Altman Z-scores |
Ratios that can indicate the likelihood of bankruptcy |
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Z-scores: five-ratio model |
Publicly owned manufacturing companies |
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Z-scores: four-ratio model |
Public or privately owned manufacturing and service companies |
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Five-ratio model: potential for bankruptcy |
< 1.81 high potential > 2.99 little potential |
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Four-ratio model: potential for bankruptcy |
< 1.1 high potential > 2.6 little potential |
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Does a low Z-score in itself indicate that the company will fail? |
No |
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What happens if the auditor concludes that there may be a going-concern problem? |
The auditor should identify and assess management's plans to overcome this problem. |
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What do analytical procedures help auditors do? |
Assess the overall presentation of the financial statements. |
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When are analytical procedures required, according to auditing standardes? |
During the final review phase of the audit |
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Can auditor's expectations in final analytical procedures be less precise than those for substantive analytics? |
Yes |
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Four-step process for using analytical procedures |
1. Develop and expectation 2. Define when the diff. btw. the auditor's expectation and the client's balance would be considered significant 3. Compute the difference between the auditor's expectation and the client's balance 4. Follow up on significant differences |
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What happens if the auditor's analytical procedures identify a previously unrecognized risk of material misstatement? |
The auditor must go back and revise the original risk assessment and conduct additional procedures to address the risk |
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Who are the signing officers of publicly traded companies? |
CEO or CFO |
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What should auditors obtain at the end of each audit? |
A management representation letter |
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What is the purpose of the management representation letter? |
To promote audit quality |
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Who prepares the management representation letter? |
The auditor |
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Management's refusal to sign the management representation letter is considered a |
scope limitation |
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Two situations relating to events occurring after the balance sheet date that require special audit attention: |
1. Those that provide evidence of conditions that existed at the date of the financial statements 2. Those that provide evidence of conditions that arose after the date of the financial statements |
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What is the period between the balance sheet date and the audit report date known as? |
the subsequent period
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When does the auditor have no responsibility to continue obtaining audit evidence? |
after the audit report date |
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Subsequent events review |
review of events occurring in the period between the balance sheet date and the audit report date to determine their possible effect on the financial statements |
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Type I subsequent events provide evidence about conditions that... |
existed at the balance sheet date |
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Type II subsequent events indicate conditions that... |
did not exist at the balance sheet date, but that may require disclosure |
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For type II subsequent events, should financial statement account balances be adjusted? Should they be considered for disclosure? |
No. Yes. |
