Auditing Final Exam Review
Auditing Final Exam Review ACCT 4150
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This 8 page Study Guide was uploaded by Victoria Andreski on Sunday April 24, 2016. The Study Guide belongs to ACCT 4150 at Clemson University taught by Nancy Harp in Spring 2016. Since its upload, it has received 181 views. For similar materials see Auditing in Accounting at Clemson University.
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Date Created: 04/24/16
CHAPTER 17—Completing the Audit Engagement Contingent Liabilities • Contingent Liability—an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur • Contingent on something happening in the future o Probable—the future event is likely to occur o Reasonably Possible—the chances of the future event occurring is more than remote but less than probable o Remote—the chance of the future event occurring is slight o Examples: § Pending or threatened litigation § Actual or possible claims & assessments § Income tax disputes § Product warranties or defects § Guarantees of obligations to others § Agreements to repurchase receivables that have been sold • Audit procedures for identifying contingent liabilities o Read minutes of meetings of the board of directors, committees of the board, & stockholders § Assertion—completeness • Try to find situations outside of the GL that need to be recorded or put in the footnotes o Review contracts, loan agreements, leases, & correspondence from gov’t agencies o Review tax returns, IRS reports, & schedules supporting the client’s income tax liability o Confirm or otherwise document guarantees & letters of credit o Inspect other documents for possible guarantees or other similar agreements o Specific audit procedures conducted near completion of audit § Inquire & discuss w/ management about its policies & procedures for identifying, evaluating, & accounting for contingent liabilities § Examine documents in the entity’s records such as correspondence & invoices from attorneys for pending or threatened lawsuits § Obtain a legal letter that describes & evaluates any litigation, claims, or assessments § Obtain written representation from management that all litigation, asserted & unasserted claims, & assessments have been disclosed in accordance w/ FASB ASC Topic 450 • Management rep letter—make them legally represent to us that they’ve given us everything we’ve asked for Legal Letters • Legal letter—a letter of audit inquiry sent to the client’s attorneys o Primary means of obtaining or corroborating information about litigation, claims, & assessments • Examples: o Breach of contract o Patent infringement o Product liability o Violations of gov’t laws & regulations § Securities laws § Antidiscrimination statuses based on race, sex, age, & other circumstances § Antitrust laws § Income tax regulations § Environmental protection laws § Foreign Corrupt Practices Act § Racketeer Influenced & Corrupt Organizations Act (RICO) Commitments • Long-term contracts to purchase raw materials or sell their products at a fixed price o To obtain a favorable pricing arrangement o To secure the availability of raw materials • Long-term commitments are usually identified through inquiry of entity personnel during the audit of the revenue & purchasing processes & review of board minutes o In most cases, such commitments are disclosed in a footnote to the financial statements w/ an adjustment to OCI • Example: make a 5-year commitment to buy from a certain vendor o To get better prices o Guarantee you have raw materials Conﬁrming Pages Review for subsequent events for audit of financial statements • Type 1 Event—conditions existed before the balance sheet date & affect estimates that are part of financial statements o Require adjustment of the financial statements 586 Part 6TCompleting the Audit and Reporting Responsibilities sheet date & do NOT affect the accuracy of the financial statements o Require disclosure & possibly pro forma financial statements FIGURE 17–1 The Subsequent-Events Period for EarthWear Clothiers Financial Audit Issue statement report ﬁnancial date date statements 12/31/11 2/15/12 3/5/12 Subsequent discovery of facts Subsequent-events period existing at the date of the auditor’s report Dual dating issue o Actual report date—date they actually signed the opinion Dual Dating • When a subsequent event is recorded or disclosed in the financial statements after sufficient, appropriate audit evidence has been obtained but before the issuance of the financial statements, the auditor considers the following options for dating of the auditor’s report: o 1) “Dual date” the report (original date of report plus date of subsequent event— limits liability) o 2) Change the date of the auditor’s report to the date of the subsequent event— extends liability § Just have one date but it’s a later date Audit procedures to look for subsequent events • Inquire of management • Read minutes of meetings o Read minutes after year-end o Example of subsequent eventà plant burned down to the ground and wiped out inventory • Read interim financial statements • Inquire of legal counsel • Examine the books of original entry Review of subsequent events for audit of internal control over financial reporting • Auditors of public companies are responsible to report on any changes in internal control that might affect financial reporting between the end of the reporting period & the date of the auditor’s report • Internal audit reports • Independent auditor reports of reportable conditions • Regulatory agency reports on ICFR • Information obtained from audit of ICFR Final Evidential Evaluation Processes • Perform analytical procedures o Required by auditing standards • Obtain a representation letter o Basically signing off to you that they take responsibility for things (overrides of internal controls, any fraud, etc.) o Given you everything you asked for • Review working papers • Assess final audit results o Think about all errors you’ve found o Are they too big or small enough that we don’t care • Evaluate financial statement presentation & disclosure o Does it make sense? Are all footnotes there? • Obtain an independent review of the engagement • Evaluate entity’s ability to continue as a going concern o Going concern—company will continue on forever Archiving & Retention • Sarbanes-Oxley Act & PCAOB’s Documentation Standard: o Require audit firms to archive their public company audit files for retention within 45 days following the time the auditor grants permission to use the auditor’s report in connection w/ the issuance of the company’s financial statements o Require audit firms to retain audit documentation for 7 years from the date of completion of the engagement, as indicated by the date of the auditor’s report, unless a longer period of time is required by law o Require audit firms to retain all documents that “form the basis of the audit or review” o Require audit firms to include in the audit file for significant matters any document created, sent, or received § Includes documents that are inconsistent w/ a final conclusion § Significant changes in audit plans or conclusions must be documented Going Concern (SAS 59) • Things for the auditor to consider: o 1) Conditions & events § Financial conditions & ratios that indicate financial distress • Financial Conditions o Recurring operating losses o Current-year deficit o Accumulated deficits o Negative net worth o Negative working capital o Negative cash flow o Negative income from operations o Inability to meet interest payments • Ratios o Net worth/total liabilities o Working capital from operations/total liabilities o Current assets/current liabilities o Total long-term liabilities/total assets o Total liabilities/total assets o Net income before taxes/net sales § Other conditions & events indicating a problem • Other financial difficulties o Default on loans o Dividends in arrears o Restructuring of debt o Denial of trade credit by suppliers o No additional sources of financing • Internal matters o Work stoppages o Uneconomic long-term commitments o Dependence on the success of one particular project • External matters o Legal proceedings o Loss of a major customer or supplier o Loss of a key franchise, license, or patent o 2) Management’s plans § Sale of assets, incur additional debt, restructure existing debt, expense reduction, issue additional equity o 3) Conclude about management’s plan § If substantial doubt exists, consider the adequacy of going concern disclosure Subsequent discovery of facts existing @ the date of the auditor’s report • Notify the client that the auditor’s report must no longer be associated w/ the financial statements • Notify any regulatory agency having 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 CHAPTER 18—Reports on Audited Financial Statements What do we report on? • Financial statement “fairness” • Internal control “effectiveness” Types of Audit Opinions (SAS 58 & 79, AU 508) 1. Unqualified a. Standard wording b. Modified wording 2. Qualified 3. Adverse 4. Disclaimer The Auditor’s Standard Report o Know the 8 parts of the standard 3 paragraph report Reporting on the Financial Statement Audit: The Standard Unqualified Report Eight Elements 1. Report title 2. Addressee 3. Introductory paragraph 4. Scope paragraph 5. Opinion paragraph 6. Explanatory paragraph referring to the audit of ICFR 7. Name of auditor 8. Audit report date • The standard unqualified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance w/ PCAOB standards, & the financial statements conform to GAAP Reporting on the Financial Statement Audit: The Standard Unmodified Report Nine Elements 1. Report title 2. Addressee 3. Introductory paragraph 4. Management’s responsibility 5. Auditor’s responsibility 6. Scope paragraph 7. Opinion paragraph 8. Name of auditor 9. Audit report date • The standard unmodified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance w/ GAAS, & the financial statements conform to GAAP Adjustments to the Standard Unqualified/Unmodified Financial Statement Audit Report • Explanatory paragraph—reference to report on audit of ICFR • Explanatory paragraph—going concern • Modified wording—opinion based in part on the report of another auditor • Explanatory paragraph—lack of consistency • Explanatory paragraph—additional emphasis Use of Other Auditors 1. Willing to take full responsibilityà Unqualified Standard Report 2. Willing to share responsibilityà Unqualified Modified 3. Not willing to take responsibility OR other auditor’s report includes a material qualificationà Qualified Lack of Consistency • Changes affecting consistency o Change in accounting principle o Change in reporting entity o Correction of an error in principle • Changes NOT affecting consistency o Change in accounting estimate o Change expected to have a material future effect o Change in classification & reclassification Additional Emphasis • Under certain circumstances an auditor may want to emphasize a specific matter regarding the financial statements even though he/she intends to express an unqualified/unmodified opinion • This information should be presented in an explanatory paragraph Conditions for Departure from Unqualified/Unmodified Report • Scope limitation o Results from an inability to obtain sufficient competent evidence about some component of the financial statements o Issue a qualified opinion or a disclaimer • Departure from GAAP o Results when financial statements are materially affected by an unacceptable departure from GAAP o Issue a qualified opinion or adverse opinion • Lack of auditor independence o Results when auditor has some form of prohibited relationship w/ the client o Issue a disclaimer Departures from an Unqualified/Unmodified Financial Statement Audit Report • Qualified—“except for” • Disclaimer • Adverse Effect of Materiality: Pervasiveness Pervasive effects on the financial statements are those that: 1. Are not confined to specific elements, accounts, or items of the financial statements; 2. If so confined, represent or could represent a substantial proportion of the financial statements; or 3. With regard to disclosures, are fundamental to users’ understanding of the financial statements Applying this guidance requires a lot of auditor judgment! Special Reporting Issues • Different reports on comparative financial statements • Change in report on prior-period financial statements • Report by a predecessor auditor o The predecessor auditor should do the following before reissuing a report on prior-year financial statements published for comparative purposes: § 1. Read the financial statements of the current period § 2. Compare the prior-period financial statements reported on w/ the current-year financial statements § 3. Obtain a letter of representation from the current-year or successor auditor Other Information in Documents Containing Audited Financial Statements • The auditor has no responsibility beyond the financial information contained in the report, & he/she has o obligation to perform any audit procedures to corroborate the other information. However, the auditor is required to read the other information & consider whether it is consistent w/ the information contained in the audited financial statements o Annual reports o Registration statements Special Reports • Financial statements prepared on a comprehensive basis of accounting other than GAAP o Regulatory basis o Tax basis o Cash (or modified cash) basis o Contractual basis • Specified elements, accounts, or items of a financial statement o In some situations an auditor may be engaged to audit only part (or specified elements, accounts, or items) of the financial statements o Rather than auditing specified elements, accounts, or items, an auditor may be engaged to apply only agreed-upon procedures • Compliance w/ aspects of contractual agreements or regulatory requirements o The auditor provides negative assurance as to compliance w/ the provisions of contractual agreements or regulatory requirements
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