Auditing Ch. 24

Front 1

Contingent Liability

Back 1

a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. (material contingent liability must be disclosed in the footnotes

Front 2

What are the three conditions required for a contingent liability to exist

Back 2

1) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition
2) There is uncertainty about the amount of the future payment or impairment
3) The outcome will be resolved by some future event or events

Front 3

one of the auditors primary concerns related to the presentation and disclosure related objectives is.....

Back 3

Determining whether management has disclosed all required information

Front 4

Commitment

Back 4

Agreements to purchase raw materials or to lease facilities at a certain price, royalty agreements, profit sharing and pension plans

Front 5

What is the most important characteristic of a commitment

Back 5

The agreement to commit the firm to a set of fixed conditions in the future

Front 6

What are some audit procedures for finding contingencies

Back 6

Inquire of management, Examine letters of credit, Obtain a letter from each major attorney of the client as to the status of pending litigation
Minutes of director meetings

Front 7

If auditors conclude that there are contingent liabilities what do they have to do

Back 7

Evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements
Disclosure may be unnecessary if the contingency is highly remote or immaterial

Front 8

Attorney's should communicate about...

Back 8

Contingencies up to approximately the date of the auditors report

Front 9

What are the two categories of the refusals by attorney's to provide auditors with complete information about contingent liabilities

Back 9

1) The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities
2) The attorneys refuse to disclose information that they consider confidential

Front 10

Unasserted claim

Back 10

Violation of a patent agreement that could result in a significant loss to the client if it were known (2nd category of refusal)

Front 11

Highlights of standard letter to attorneys

Back 11

Request to communicate about contingencies up to approximately the date of the audit report
Mailed sufficiently early in the audit process

Front 12

Sarbanes-oxley act rules for attorneys

Back 12

Congress included provisions in this act directing the SEC to issue rules requiring attorneys serving public companies to report material violations by the company of federal securities laws

Front 13

American Bar Association rule

Back 13

Amended its attorney-client confidentiality rules to permit attorneys to breach confidentiality if a client is committing a crime or fraud

Front 14

Review for subsequent events

Back 14

Auditor's responsibility for these events is normally limited to the period beginning with the balance sheet date and ending with the date of the auditor's report.

Front 15

Two types of subsequent events

Back 15

1)Those that have a direct effect on the financial statements and require adjustment of the current year's financial statement amounts (must relate to conditions that existed at balance sheet date)
2) Those that have no direct effect on the financials, but for which disclosure is required

Front 16

What subsequent period events require an adjustment of current years financials if the amounts are material

Back 16

1) Declaration of bankruptcy by an A/R customer
2) Settlement of litigation at an amount different from the amount recorded on the books
3) Disposal of equipment not being used in operations at a price below the current book value
4) Sale of investments at a price below recorded cost

Front 17

If auditors conclude that subsequent events reflect a material weakness that existed at year end, what opinion must they issue on internal control

Back 17

Adverse Opinion
If the events were subsequent to year end then the auditor must include an explanatory paragraph or direction to the disclosure

Front 18

Events or transactions that may require disclosure instead of an adjustment

Back 18

1) Decline in the market value of securities held for temporary investment
2) Issuance of bonds or equity securities
3) Decline in the market value of inventory as a consequence of governement action
4)uninsured loss of inventories as a result of a fire
5) Merger or acquisition

Front 19

What are the two categories of audit procedures for the subsequent events review

Back 19

1) Procedures normally integrated as a part of the verification of year end account balances (cutoff and valuation tests)
2) Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events (completeness presentation and disclosure)

Front 20

what should an auditor do if journals are not kept up to date

Back 20

Review documents that will be used to prepare the journals

Front 21

What specific audit tests can be used to search for subsequent events

Back 21

Inquire of management
Correspond with attorneys
Obtain a letter of representation
Examine minutes issued subsequent to balance sheet date
Review records
Review internal statements

Front 22

When does a dual dated audit report occur

Back 22

In the very unusual situation when a subsequent event occurred AFTER the field work was completed but BEFORE the audit report was issued

Front 23

What two options does the audito have when a subsequent event occurs after field work was completed but before issuance of the audit report

Back 23

1) Revise the audit report date after expanding it to include subsequent events to the new date
2) Restrict the "new" subsequent events and present two dates in the audit report( first date is date of field work completion except for a specific exception, second date deals with exception and is always later)

Front 24

Letter of representation

Back 24

Documenting managements most important oral representations made during the audit (letter us mandatory and includes discussions about subsequent events and other related matters)

Front 25

What are the purposes of the management representation letter

Back 25

1) Impress upon management its responsibility for the assertions in the financial statements
2) Remind management of potential misstatements or omissions in the financial statements
3) Document the responses from management to inquiries about various aspects of the audit

Front 26

Categories of specific matters for management representation letter

Back 26

Financial statements
Completeness of information
Recognition, measurement, and disclosure
Subsequent events

Front 27

What two types of opinions are allowed in an auditors statement about information accompanying basic financial statements

Back 27

Positive opinion indicating a high level of assurance
Disclaimer indicating no assurance

Front 28

Issue the Audit report

Back 28

Audit report is the only thing that most users see in the audit process and the consequences of issuing an inappropriate report can be severe