Term
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Definition
| litigation, claims, and assessments |
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Term
| Who is responsible for adopting policies and procedures to identify, evaluate, and account for LCA? |
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Definition
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Term
| Which accounting principles are applicable to LCA? |
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Definition
| Those relevant to contingencies. |
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Term
| With respect to LCA, the auditor should obtain evidence relevant to the following: |
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Definition
Circumstances indicating an uncertainty as to possible loss from LCA.
The period in which the underlying cause for legal action occurred.
The probability of an unfavorable outcome.
The amount or range of potential loss. |
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Term
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Definition
| Inquiring about, and discussing with management, the policies and procedures for identifying, evaluating, and accounting for LCA. |
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Term
| description and evaluation of LCA |
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Definition
| Obtaining from management a description and evaluation of LCA at period end, and from then to the date the info is provided, including an identification of matters referred to legal counsel. The auditor should also be assured in writing from management that all matters required to be disclosed by GAAP have been disclosed. |
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Term
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Definition
| Examining documents in the client's possession (correspondence and invoices from lawyers). |
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Term
| disclosure of unasserted claims (LCA) |
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Definition
| Obtaining written assurance from management that it has disclosed all unasserted claims that the lawyer has advised them that are probable of assertion and that must be disclosed in accordance w/GAAP. |
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Term
| applying related procedures (LCA) |
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Definition
| An audit normally includes procedures undertaken for other purposes that might also provide evidence about LCA. |
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Term
| examples of related procedures (LCA) |
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Definition
Reading minutes of BOD and other meetings held during and subsequent to the audited period.
Reading legal docs.
Obtaining info about guarantees from bank confirmations.
Inspecting other docs for possible guarantees by the client.
Requesting the client mgmt. to send a letter of audit inquiry to lawyers w/whom management consulted. |
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Term
| Can an auditor make legal judgments? |
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Definition
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Term
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Definition
| auditor's primary means of obtaining corroboration of the info provided by mgmt.; sent to the client's lawyer. |
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Term
| Does the letter of audit inquiry substitute for information provided by inside counsel? By outside counsel? |
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Definition
Inside counsel information may corroborate this info.
No. |
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Term
| components of letter of audit inquiry |
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Definition
1. Identification of the entity and its subsidiaries and the date of the audit.
2. A mgmt. list that describes and evaluates pending or threatened LCA w/respect to which the lawyer has devoted substantive attention on the entity's behalf.
3. A mgmt. list that describes and evaluates unasserted claims that management considers probable and have at least a reasonable possibility of an unfavorable outcome w/respect to which the lawyer has devoted substantive attention on the entity's behalf. |
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Term
| For each matter on the management list of pending and threatened LCA, as well as unasserted claims, the lawyer should provide or comment on information pertaining to the following: |
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Definition
The nature of the matter, the progress of the case, and the entity's intended action.
The probability of an unfavorable outcome and an estimate, if possible, of the amount or range of loss.
Omission of any pending or threatened LCA from management's list.
4. A client statement.
5. A request that the lawyer explain any limitation on his/her response. |
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Term
| client statement (of letter of audit inquiry) |
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Definition
| states that the client understands that the lawyer will advise the client when an unasserted claim or assertion w/respect to which s/he has provided legal services requires the client to disclose in accordance w/GAAP |
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Term
| Must be inquiry be made about material matters? About immaterial matters? |
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Definition
Yes.
No, not if the client and the auditor have an understanding about the limits of materiality. |
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Term
| When can a lawyer limit his/her response to matters? |
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Definition
| When substantive attention has already been given. |
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Term
| To which matters is a lawyer's response often limited? |
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Definition
| Matters considered individually or collectively material, not limits on the audit scope. |
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Term
| lawyer's refusal to furnish the information requested in an inquiry letter |
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Definition
| a limitation on the audit scope sufficient to preclude an unqualified opinion. |
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Term
| What does the auditor normally do in the event of a lawyer's refusal? |
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Definition
| The auditor disclaims an opinion. |
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Term
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Definition
| sometimes prevents a lawyer from being able to reach a conclusion on some matters. |
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Term
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Definition
| material events or transactions that occur after the B/S date, but prior to F/S issuance and that require adjustment of or disclosure in the F/S. |
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Term
| types of subsequent events |
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Definition
One type consists of events providing additional evidence about conditions at the B/S date and affecting the estimates in the F/S
A second type consists of evidence about conditions that arose subsequent to the B/S date. |
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Term
| Which type of subsequent event requires adjustment to the F/S? Which one requires disclosure but not adjustment? |
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Definition
Type 1; the one that provides information about conditions at the B/S date; requires adjustment.
Type 2; the one that occurs after the B/S date; may require disclosure (and possibly pro forma financial data) but not adjustment. |
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Term
| examples of Type 2 subsequent events |
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Definition
Sale of a bond or stock issue
Purchase of a business
Settlement of litigation when the claim arose after the B/S date
Loss of plant inventories as a result of fire or flood
Losses of receivables resulting from conditions arising after the B/S date. |
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Term
| accounting treatment of subsequent events affecting the realization of assets or the settlement of estimated liabilities |
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Definition
| Ordinarily require adjustment; usually are the culmination of conditions that existed over a relatively long time. |
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Term
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Definition
| period between B/S date and audit report date |
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Term
| auditing procedures in the subsequent period |
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Definition
Examining data to:
Ensure proper cutoffs and
Gather information to aid the auditor in the evaluation of assets and liabilities as of the B/S date. |
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Term
| auditing procedures at end of subsequent period |
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Definition
Reading the latest interim F/S and comparing them with the F/S being reported on.
Discussion w/responsible executives.
Reading minutes of meetings of shareholders, BOD, and appropriate committees.
Obtaining letter of audit inquiry from client's legal counsel about LCA.
Obtaining letter of representations, dated as of date of the auditor's report.
Making inquiries or performing any procedures the auditor deems necessary to dispose of questions resulting from the foregoing procedures, inquiries, and discussions. |
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Term
| Discussion w/responsible executives at end of subsequent period includes... |
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Definition
Whether the interim statements were prepared on same basis as were the statements reported on.
Whether substantial contingent liabilities or commitments existed at the dates of the B/S or the inquiry.
Whether any significant change occurred in capital stock, noncurrent debt, or working capital prior to the date of inquiry.
Whether any unusual adjustments were made during the subsequent period.
The current status of items that were accounted for on the basis of tentative, preliminary, or inconclusive data. |
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Term
| After the date of the report, is the auditor obligated to make further inquiries or perform other procedures w/respect to the audited F/S? |
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Definition
| No, not unless new information that may affect the report comes to the auditor's attention. |
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Term
| New information after the report date. |
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Definition
| If the information is of such a nature and source that the auditor would have investigated it had it come to his/her attention during the audit, the auditor should determine if the information is reliable and whether the facts existed at the report date. |
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Term
| What should the auditor do to prevent future reliance on the report? |
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Definition
| Advice the client to make appropriate disclosures to the persons who are known to be currently relying on or could be likely to rely on the F/S and the related report. |
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Term
| When the client makes the appropriate disclosures to prevent future reliance on audit report, one of the following should be done... |
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Definition
a. If the effects of the subsequently discovered info can be promptly determined, revise the F/S and audit report A.S.A.P. and include in F/S notes the reasons for the revisions.
b. When issuance for statements in a subsequent period is imminent, make appropriate can be made in F/S.
c. When effects on statements of subsequently discovered info cannot be determined w/out prolonged investigation, persons who are known to be relying or who rely on F/S and related report should be notified by the client. |
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Term
| If client refuses to make disclosures necessary to prevent future reliance on audit report, the auditor should... |
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Definition
notify each BOD member of the refusal and of the auditor's intent to prevent future reliance on the report.
The auditor should:
1. Notify client that report must no longer be associated w/F/S.
2. Notify regulatory agents that the report must not be relied upon.
3. Notify each person known to be relying on the F/S that the report must not be relied upon. |
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Term
| auditor and management representations |
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Definition
| The independent auditor must obtain written representations from management as a part of an audit in accordance w/GAAS. |
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Term
| Do management representations substitute for necessary auditing procedures? |
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Definition
| No, but they are part of the audit evidence. |
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Term
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Definition
| acknowledges management's responsibility for the assertions made in the F/S. It also affirms management's responsibilities to the auditor and for the fairness of F/S. |
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Term
| What do written representations from management ordinarily do? |
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Definition
1. Confirm oral representations given to the auditor.
2. Document the continuing appropriateness of the representations, and
3. Reduce the possibility of misunderstandings. |
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Term
| Does the auditor use auditing procedures specifically designed to corroborate written representations? |
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Definition
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Term
| Who drafts the management representation letter? |
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Definition
| Although addressed to the auditor, the letter is drafted by the auditor. |
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Term
| Who signs the management representation letter? |
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Definition
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Term
| Does the management representation letter require specific disclosure to the auditor? |
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Definition
| It assumes not. If such matters exist, they should be indicated by listing them following the representation referring to accounting records or F/S, etc. |
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Term
| To what are representations limited, (with the exception of fraud, reg. agency communications and representations not directly related to F/S)? |
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Definition
| Matters considered individually or collectively material, not limits on the audit scope. |
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Term
| How long is the representation letter according to AICPA standards? Do most letters follow this length requirement? |
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Definition
1 page, according to auditing standards.
in practice management rep. letters are often longer because many CPA firms require management to affirm each key assertion for each major account as well as the other affirmations. |
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Term
| If the auditor reports on subsidiary statements, what to do for management rep. letter? |
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Definition
| Obtain representations from the parent. |
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Term
| Written representations should be... |
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Definition
Addressed to the auditor.
Dated as of the audit report date.
Signed by responsible and knowledgeable members of management; usu. CEO and CFO. |
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Term
| ISAs and management representation letters |
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Definition
| Management representations should include disclosure to the auditor of its assessment of RMM due to fraud. |
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Term
| What should the auditor do if management refuses to provide written representations or provides all representations but obstructs audit procedures from being performed? |
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Definition
| In the event of this scope limitation, the auditor should consider qualifying or disclaiming the opinion and consider if other representations can be trusted. |
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Term
| SEC requirements for signing F/S |
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Definition
| CEO and CFO must personally certify to the SEC that annual and quarterly reports filed in accordance with the '34 Act contain no material misstatements. |
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Term
| PCAOB AS No. 5 requirements for audits |
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Definition
| ICFR + F/S audits = integrated audit. |
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Term
| Does the AICPA require an integrated audit? |
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Definition
| No, but AT 501 provides for the optional performance of a similar service for a nonissuer. |
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Term
| Additional representations should include the following... |
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Definition
1. That management is responsible for establishing and maintaining effective ICFR.
2. That management has evaluated IC, specified the control criteria, and stated its assertion about the effectiveness of IC.
3. That management has disclosed to the auditor all deficiencies in IC.
4. That deficiences identified and communicated to those charged w/governance during previous engagements have been resolved and that unresolved deficiencies have been identified. |
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Term
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Definition
| The auditor must evaluate whether a substantial doubt exists about an entity's ability to continue as a gong concern for a reasonable period. |
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Term
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Definition
| Continuation as a going concern is assumed in financial reporting absent significant contrary information. |
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Term
| contrary information to going concern assumption |
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Definition
Such contrary information relates to the inability to continue to meet obligations as they fall due without, for example, one of the following:
1. Substantial disposal of assets outside the ordinary course of business
2. Debt restructuring
3. Externally forced revisions of operations. |
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Term
| When does the going concern assumption apply? When does it not apply? |
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Definition
It applies to audits of F/S prepared in accordance w/GAAP or applicable reporting framework.
Doesn't apply when F/S are prepared in the liquidation basis. |
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Term
| auditor responsibility w/respect to going concern |
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Definition
| The auditor must "evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond date of F/S being audited. |
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Term
| Evaluation of going concern is based upon... |
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Definition
| Relevant conditions and events as of the report date. |
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Term
| process of going concern evaluation |
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Definition
The auditor considers whether the results of normal auditing procedures identify conditions and events that, in the aggregate, indicate that substantial doubt could exist (conditions and events).
Additional info about substantial doubt, as well as evidence supporting info that mitigates the substantial doubt may need to be gathered. |
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Term
| If the auditor believes a substantial doubt exists, what should be done? |
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Definition
| The auditor should obtain information about management's plans to mitigate the effect of such conditions and events and assess the likelihood that the plans will be effective. |
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Term
| If the auditor has a substantial doubt... |
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Definition
Consider the adequacy of disclosure about the going concern issue.
Include an explanatory paragraph (after the opinion paragraph) in the audit report. Also, a disclaimer of an opinion is possible.
If not, s/he should still consider the need for disclosure, but no explanatory paragraph. |
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Term
| If the entity fails to continue as a going concern, even w/in the year after the date of the F/S, is this indicative of inadequate auditor performance? |
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Definition
| No. Thus, omission of the reference to substantial doubt provides no assurance of continuation as a going concern. |
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Term
| Do specialized audit procedures need to be designed for going concern? |
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Definition
| Procedures needs not be designed solely to identify conditions and events b/c typical audit procedures should be sufficient. |
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Term
| audit procedures for going concern |
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Definition
Analytical procedures
Review of subsequent events
Review of compliance w/debt and loan agreements
Reading minutes of shareholders, BOD, and committees.
Inquiry of legal counsel about litigation, claims, and assessments.
Confirmation w/related and 3rd parties of arrangements for financial support. |
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Term
| On what does the significance of conditions and events (substantial doubt) depend? |
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Definition
| Circumstances of appearance, and some may be significant only in conjunction with others. |
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Term
| list of conditions and events |
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Definition
Negative financial trends
Financial difficulties
Internal matters- labor difficulties, substantial dependence on success of one project, uneconomic long-term commitments, and the need to revise operations significantly.
External matters- litigation or legislation; loss of a key franchise, license, or patent; loss of principal customer or supplier; un- or under-insured catastrophe. |
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Term
| auditor and management's plans- given substantial doubt of the auditor |
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Definition
Given substantial doubt, the auditor should:
1. consider management's plans for responding to conditions and events,
2. obtain information about those plans,
3. consider the likelihood that the adverse effects will be mitigated and the plans can be effectively implemented. |
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Term
| possible management plans in the event of substantial doubt of going concern |
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Definition
Disposing of assets
Borrowing money or restructuring debt
Reducing or delaying expenditures
Increasing ownership equity |
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Term
| auditor considerations for disposing of assets |
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Definition
Restrictions such as those in loan agreements or interests held by other parties.
Marketability of the assets to be sold.
Direct or indirect effects |
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Term
| auditor considerations for borrowing money or restructuring debt |
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Definition
Availability of debt financing, including credit arrangements, such as lines of credit, factoring of receivables, or sale-leasebacks
Arrangements to restructure or subordinate debt or to guarantee loans to the entity.
Existing restrictions on borrowing or the sufficiency of available collateral. |
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Term
| auditor considerations for reducing or delaying expenditures |
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Definition
Feasibility of plans to reduce overhead or administrative expenses, postpone maintenance or R&D, or lease rather than purchase
Direct or indirect effects |
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Term
| auditor considerations for increasing ownership equity |
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Definition
Feasibility of such plans, including arrangements to obtain capital.
Arrangements to reduce dividends or accelerate cash receipts from affiliates or other investors. |
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Term
| Why are elements of management plans are needed for audits? |
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Definition
| The elements of plans that are particularly significiant to overcoming the adverse effects should be identified and procedures performed to obtain evidence about them, for example, about the ability to obtain additional financing. |
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Term
| prospective financial information (PFI) |
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Definition
| important to management's plans. Therefore, the auditor should request such information and consider the adequacy of support for significant underlying assumptions. |
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Term
| When reading PFI, special attention should be given to assumption that are... |
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Definition
Material,
Especially sensitive or susceptible to change, and
Incosistent with historical trends. |
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Term
| What should the auditor do with PFI? |
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Definition
Read the PFI and assumptions.
Compare PFI for prior periods w/results and for the current period w/results to date. |
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Term
| If the effects of certain factors are not reflected in the PFI, the auditor should... |
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Definition
| discuss them with management and, if necessary, request revision. |
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Term
| Information disclosed in the F/S, with respect to substantial doubt, includes... |
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Definition
1. The conditions and events on which the substantial doubt is based, their possible effects, and management's evaluation of their significance and of any mitigating factors.
Possible discontinuance of operations.
Maangement's plans, including PFI (to GAAS specifications, not guidelines for PFI).
Info about recoverability or classification of recorded assets or the classification of liabilities. |
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Term
| If the auditor decides that substantial doubt is mitigated after considering management plans, s/he should then... |
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Definition
Consider disclosure of:
1. The principal conditions and events that led to the substantial doubt
2. Their possible effects and
3. Any mitigating factors, including management's plans. |
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Term
| If the auditor has a substantial doubt, the audit report should include... |
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Definition
| an explanatory paragraph following the opinion paragraph. The wording of the auditor's conclusion should include the phrases "substantial doubt" and "going concern." |
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Term
| If disclosure is inadequate, the auditor may... |
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Definition
| modify the opinion or disclaim the opinion in cases involving uncertainties. |
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Term
| documentation of substantial doubt |
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Definition
1. Conditions or events causing the belief.
2. Important elements of management plans to overcome the problem considered by the auditor.
3. Auditing procedures performed and evidence obtained.
4. Auditor's conclusions, including any effects on the F/S or disclosures and any effect on the audit report. |
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Term
| communications of substantial doubt |
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Definition
Communicate the following to those charged w/governance:
1. Nature of identified conditions and events
2. F/S effects
3. Adequacy of disclosure
4. Audit report effects |
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Term
| ISAs and going concern responsibilities |
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Definition
| The ISAs state that management is responsible for assessing the ability to continue as a going concern. The auditor's responsibilty is to evaluate the assessment. |
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Term
| ISAs and substantial doubt |
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Definition
| When events or conditions that may cast significant doubt have been identified, the auditor should obtain written reps. from mgmt. regarding its plans for future action. These documents are included in the mgmt. rep. letter. |
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Term
| ISA and going concern assessment (length of time for which to assess going concern) |
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Definition
| While AICPA standards require the audito to evalute going concern for a reasonable period not to exceed 1 year beyond the F/S date, the ISAs require consideration of going concern issues extending to at least, but not limited to, 1 year. |
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