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70 Cards in this Set

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What is an example of substantive procedure to test for occurrence and rights and obligations?
Review debt contracts to determine that accounts receivable are pledged as collateral
What is an example of substantive procedure to test for completeness
Use a disclosure checklist to determine if the financial statements include all disclosures required by accounting standards
What is an example of substantive procedure to test for classification and understandability
Review financial statements to determine if assets are properly classified between current and noncurrent categories. Read the footnotes for clarity.
What is an example of substantive procedure to test for accuracy and valuation
Reconcile amounts included in the long term debt footnotes to information examined and supported in the auditor's long term debt audit working papers.
The 5 types of final evidence accumulation are
1. perform final analytical procedures
2. Evaluate going concern assumption
3. Obtain management representation letter
4. Consider info accompanying basic financial statements
5. REad other information in the audit report
Perform final analytical review procedures
Analytical procedures are required. They are useful as a review for material misstatements or financial problems not noted during other testing and to help the auditor take a final objective look at the financial statements. Common for a partner to do these.
When performing the review the partner generally reads the financial statements, including footnotes and considers 2 things:
1. The adequacy of evidence gathered about unusual or unexpected account balances or relationships identified during planning or while conducting the audit.
2. Unusual or unexpected account balances or relationships that were not previously identified.
Evaluate going concern assumption
Auditor must evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least one year beyond the balance sheet date. Auditors make the assetssment initially as part of planning but may revise it after obtaining new information.
What do auditors use to determine whether to update going concern assumption?
Auditors use analytical procedures, discussions with management about potential financial difficulaties, and their knowledge of the client's business gained throughtout the audit to assess the likelihood of financial failure within the next year.
When is it desireable to make the final going concern assessment?
After all evidence has been accumulated and proposed audit adjustments have been incorporated into the financial statements
Letter of representation
Document's management's most important oral representations made during the audit. Letter is prepared on the client's letterhead, addressed to the CPA firm, and signed by high-level corporate officials, usually the president and CEO.
What are the 3 purposes of the client letter of representation?
1. To impress upon management its responsibility for the assertions in the financial statements.
2. To remind management of potential misstatements or omissions in the financial statements.
3. To document the responses from management to inquiries about various aspects of the audit.
To impress upon management responsibility for assertions made in financial statements.
It is easy for management to forget they are responsible, not the auditor, for the fair presentation of financial statements, especially in smaller companies where managers lack expertise in accounting.
To remind management of potential misstatements or omissions in financial statements
For example, if the letter of representation includes a reference to pledged assets and contingent liabilities, honest management may be reminded of its unintentional failure to disclose the information adequately, which helps satisfy the completeness presentation and disclosure objective. Fo fulfill this objective, the letter of representation should be sufficiently detailed to act as a reminder to management.
To document the responses from management to inquiries about various aspects of the audit. Why is this important
This provides written documentation of client representations in the even t of a disagreement or lawsuit between the auditor and client. Because it is mor formal than oral communication, also helps reduce misunderstanding btwn management and auditor.
Auditing standards suggest 4 categories of specific matters that should be included:
1. Financial statements
2. Completeness of infomration
3. Recognition, measurement, and disclosure
4. Subsequent events
Financial statements what assertions does management make in the letter of representation.
MAnagement's acknowledgement of its responsibility for fair presentation.
Management's belief that financial statements are preesnted fairly in conformity with financial statements.
Completeness of information what assertions does management make in the letter of representation.
That availability of all finaicla records and related data
Completeness and availability of all minutes of meetings of stockholders, directors, and committee directors.
Recognition, measurement, and disclosure what assertions does management make in the letter of representation.
Management's belief that the effects of ucorrected financial stateet misstatements are immaterial.
Info concerning fraud invoving management, employees who have significant roles in internal control, or others where fraud could occur have a material effect on financials.
Info concerneing related party trans and amounts receivable from or payable to related parties
Unasserted claims or assessments that the entity's lawyer has advised problems of assertion and must be disclosed in accordance with accounting standards.
Subsequent events what assertions does management make in the letter of representation.
Bankruptcy of a major customer with an outstanding account receivable at BS date.
A merger or acqusition after bs date.
What is a client representation letter?
It is a written statement from a nonindependent source and therefore CANNOT BE REGARDED AS RELIABLE EVIDENCE.
In some audits auditor may find info that contradicts statements in letter of representation what should auditor do if that is the case?
The auditor should investigate the circumstances and consider whether representations in the letter are reliable.
Clients often provide additional information beyond basic financial statements in materials prepared for management or outside usere. Auditing standards refer to this as?
supplementary information in relation to the financial statements as a whole.
Auditing standards intentionally refrain from defining or restricting supplementary info to enable companies to do what?
Individualize the information to meet he needs of statement users. However, several types of information are commonly included in the additional information section, such as detailed comparative statements supporting the totals on the primary financial statements for accounts such as cost of goods sold and operating expenses
What must the auditor do in regards to suppementary info?
They must clearly distinguish their audit responsibility and supplementary responsibility. Usually the auditor has not performed a sufficientely detailed audit to justify an opinion on the additional information. Supplementary info must be derived from accounting records used to generate the basic financial statements and involve the same time period as the basic financial statements.
When reporting on supplementary info, the auditor uses
the same materiailty as that used in forming an opinion on the basic financial statements. As a result, the additional procedures required are less extensive than if the auditor were issuing an opinion on the information taken by iteself.
Auditor reporting on supplementary information can be either:
1. in an explanatory paragraph following the opinion paragraph in the auditor's report on the financial statements
2. Separate report on supplementary info
If supplementary info is materially misstated what should auditor do?
Auditor should request management to revise. If they refuse, should modify audit opinion on supplementary info and describe misstatements in the audit report.
When required supplemental information accompanies basic statements auditing standards require the auditor
perform additional procedures limited to inqiury of management about methods of preparing the information and comparison of the information for consistency with management's responses to the auditor's inquiries, the basic financil statements, and to information the auditor obtains during the audit of the basic financial stateents.
What is the auditor required to do with other information included in annual reports?
Auditor is required to read other infomration pertaining the financial statements
What does this responsibility pertain to?
Pertains to information that is not part of the financial statements but is published with them. Examples are the president's letter and explanations of company activities included in the annual reports of nearly all publically held companies. It usually takes auditors only a few minutes to make sure that the nonfinancial information is consistent with the statements.
IF there is a material inconsistency what should auditors do?
They should request the client to change. If client refuses auditor should include an explanatory paragraph in the audit report or withdraw from the engagement.
After performing all audit procedures what does the auditor do?
Must integrate all info into one overall conclusion and decide whether sufficient evidence has been accumulated to warrant the conclusion that the financial statements are stated in accordancew ith accounting standards on a basis consistent with those of the preceding year.
To make a final decision what must the auditor consider?
Must consider whether sufficient appropriate evidence has been accumulated, the auditor reviews documentation for the entire audit to determine if all material classes of transactions, accounts and disclosures have been adequately tested.
What do auditors often use as an aid to ensure audit evidence is adequate?
A completing the audit checklist which serves as a reminder of things that may have been overlooked.
If they conclude sufficient evidence has NOT been obtained 2 choices:
1. Accumulate additional evidence
2. issue a qualified or disclaimer
What is an essential part of determineing if audit is fairly stated?
Summary of misstatements. When any one misstatement is material, auditor should propose client correct the amount. It may be difficult to determine the appropriate amount of adjustment becasue the exact amount of the misstatement may be unknown if it involves an estimate or includes sampling error. Nevertheless the auditor must determine the adjustment.
What must the auditor do with immaterial misstatements?
They must combine the m and determine if the total amount is material.
What to auditors often use when determining materiality of immaterial misstatement?
Unadjusted audit schedule
If auditors believe there IS sufficient evidence but NOT fairly presented 2 options:
1. Statements must be revised or
2. Qualified or adverse must be issued.
Financial disclosure checklist
Designed to remind auditors of common disclosure problems in the financial statements and to facililtate final review of the entire audit by an independent partner.
What 3 reasons for experienced member of the audit firm to thoroughly review audit documentation at the completion of the audit?
1. Evaluate performance of inexperienced audit personnel
2. To make sure that the audit meets the CPA firm's standard of performance
3. To counteract the bias that often enters the auditor's judgment
Evaluate performance of inexperienced audit personnel
A considerable portion of most audits is performed by audit personnel with fewer than four or five years of experience. These people may have sufficient technical training to conduct an adequate audit, but their lack of experience affects their ability to make sound professional judgments in complex situations.
To make sure CPA firm's standards of performance are met
Within any CPA firm, the quality of staff performance varies considerably but careful review by top level management ensures firm maintins uniform quality
To counteract the bias that often enters auditor's judgment
Auditors must try to be objective but may lose this when long audit or with complex audit problems
Review of audit doc should be done by
someone knowledgable about the client and audit circumstances.
How does audit review work?
Auditor's immediate sup reviews their work, then senior's immediate superior, usually a manager or supervisor reviews their work as well as lower ppl's, then seniors work is reviewed by partner.
Independent review
at end of the audit common to have financial statments reviewd by a completely independent reviewer who is a member of the audit form but didn't participate in the audit. The purpose is to take an adverserial positon to ensure all conduct was adequate. Audit team must jstify the evidence accumulated and conclusons reached.
When should the audit report be issued?
Audit report should be issued after all evidence has been accumulated and evaluated.
Why should they wait to issue audit report until all evidence has been accumulated and evidence evaluated
because report is the only thing most useres see and consequences of issuing inapproprite aduit report can be severe.
Communication of fraud and illegal acts
Auditing standards require auditor to communicate all fraud and illegal acts to audit committee regardless of materiality. Purpose is to assist audit committee in performing their supervisory role for reliable financial statements.
Comminicate internal contorl deficiencies
Must communicate in writing significant internal control deficiencies and material weaknesses in the design or operations of internal control to those charged with governance. IN larger companies, this communication is made to the audit committee and in smaller companies, it may be made to the owners or senior management.
Other communications
Also required to comm additional info purpose is to keep audit committee informed about significant and relevant info for oversight of ifnancial reporting process and o provide an opportunity for audit committee to communicate the important matters to auditor.
4 purposes of additonal communication
1. To communicate auditor responsibilities in the audit of financisl statements.
2. To provide an overview and scope and timing of the audit.
3. To provide those charged with governance with significant findings arising during the audit.
4. To obtain those changed with governnance info relevant to audit.
How are communications made about significant findings usually done?
Usually done in writing.
If anyting is done orally what must be done?
Must be written documentation in the audit file.
Management letter
made to inform client personnel of CPA's recommendations for improving any part of the client's business. Typically focus on suggestions for more efficient operation.
Why do CPA's do management letters?
To demonstrate to management the firm provides additional value to the business beyond audit serice provided. Intent is to encorage a better relationship with management and to suggest additional tax and permitted management services the CPA can provide.
Subsequent discovery of facts
Auditors sometimes learn things after the audited financials statements have been issued that they are materially misstated/
When there is a subsequent discovery of facts what must audtor do?
Auditor has a responsibility to make certain that users relying on the statements are infomred about thie misstatements.
Does it matter who discovers these errors?
Doesn't matter if management or auditor discovers these misstatements, auditor's responsiblity is the same
If these are discovered what steps must auditor take?
Auditor has to ask client issue an immediate revision including explanation of reason for revision. If subsequent period financials are completed, they can just disclose the misstatements in the subsequent period.
If client refuses to revise what must auditor do?
Must take it to the BOD and notify regularatory agencies that statements are nolonger fair. Then must request SEC to notify stockholders.
Subsequent discovery of facts
Auditors sometimes learn things after the audited financials statements have been issued that they are materially misstated/
When there is a subsequent discovery of facts what must audtor do?
Auditor has a responsibility to make certain that users relying on the statements are infomred about thie misstatements.
Does it matter who discovers these errors?
Doesn't matter if management or auditor discovers these misstatements, auditor's responsiblity is the same
If these are discovered what steps must auditor take?
Auditor has to ask client issue an immediate revision including explanation of reason for revision. If subsequent period financials are completed, they can just disclose the misstatements in the subsequent period.
If client refuses to revise what must auditor do?
Must take it to the BOD and notify regularatory agencies that statements are nolonger fair. Then must request SEC to notify stockholders.
When does the auditors responsiblity for subsequent events review end?
Ends on the date of completion of field work. They have no responsiblity to search for subesquent facts but if they are discovered they MUST take action to correct them.
When does auditor's responsibility end?
ENDS AT THE AUDIT REPORT DATE.