chapter 24

1. chapter 24 Completing the Audit

2. Belen describe what is meant by Interim Testing.

3. date report issued end of field work report date 12/31/11 interim A B C D 3

4. date report issued end of field work report date 12/31/11 interim A B C D 4

5. Contingent Liabilities / Attorney’s Letter Subsequent Events Management Representations analytical procedures Final assessment of audit risk - opinion communications to audit comm or mgmt • SAS 114 Communicating Internal Control Related Matters Identified in an Audit • SAS 112 Communication with Those Charged with Governance subsequent discovery of facts

6. unrecorded liabilities examining subsequent payments to suppliers and other creditors to ensure that they were correctly recorded. almost $5 million of purchases applicable to Dec. 31 audit period that had not been included as liabilities.

7. Contingent Liabilities / Losses • A potential future payment to an outside party from an existing condition • Uncertainty about the amount • Outcome will be resolved by future events

8. Contingent Liabilities / Losses • Lawsuits are an example of a contingency • Income tax disputes • Guarantees of the debts of others • Unused balances on letters of credit

9. Julian what does SFAS No. 5 teach us about contingent losses or contingent liabilities

10. SFAS 5 contingencies probable estimable record loss probable not estimable disclose possible estimable or “ possible not estimable “ remote ignore

11. SFAS 5 contingencies

12. Contingencies – lawsuits audit procedures • Inquire of management • Review minutes of BoD meetings • Analyze legal expense • Obtain a letter from each major attorney

13. Nathan • Management is our primary source of information about • Litigation, Claims and Assessments • what is our most important source of evidence to corroborate managements’ representations ?

14. Inquiry of Client’s Attorney A list including • Pending litigation • Asserted or unasserted claims Information about each item on list • Likelihood of an unfavorable outcome • Amount or range of potential loss A statement that the list is complete Page 482

15. Tavian “Inquiry of a Client’s Attorney” this is an auditing procedure Who sends this letter to the attorney ? To whom does the attorney respond ?

16. Melissa Oh! “Inquiry of a Client’s Attorney” what kind of problem do we have if the attorney refuses to respond ? what kind of report will we issue ?

17. David Is there an explanatory para? Where? What is the first sentence of the intro para? What is the first sentence of the scope para? What is the first sentence of the opinion para?

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20. AU Section 560 Subsequent Events Sources: SAS No. 1, section 560; SAS No. 12. Issue date, unless otherwise indicated: November, 1972. .01 An independent auditor's report ordinarily is issued in connection with historical financial statements that purport to present financial position at a stated date and results of operations and cash flows for a period ended on that date. However, events or transactions sometimes occur subsequent to the balance-sheet date, butprior to the issuance of the financial statements and auditor's report, that have a material effect on the financial statements and therefore require adjustment or disclosure in the statements. These occurrences hereinafter are referred to as "subsequent events." .02 Two types of subsequent events require consideration by management and evaluation by the independent auditor.

21. Kevin S describe the two types of subsequent events how do we decide whether to make an adjusting entry to include the effects of the subsequent event in the financial statement balances or just disclose the event in the footnotes

22. subsequent events • Type I - adjusting journal entry • events which provide info about conditions that existed @ 12/31/11 • can be used to make better estimates or confirm estimates that were made • Type II - disclose • Conditions that came into being subsequent to 12/31/11

23. Type I - adjusting journal entry • Declaration of bankruptcy by a customer with a large account receivable • Settlement of litigation for an amount greater than recorded • Sale of investments for less than recorded amount

24. Type II - disclosure • Issue bonds or equity securities • Merger or acquisition • Loss due to fire or natural disaster

25. subsequent events – auditing procedures inquire of management read internal financial statements read minutes of Bd of Directors’ meetings obtain a letter of representation page 488

27. AU Section 333 Client Representations Source: SAS No. 85. See section 9333 for interpretations of this section. Effective for periods ending on or after September 30, 1977, unless otherwise indicated. .01 This section establishes a requirement that the independent auditor obtain written representations from management as a part of an audit performed in accordance with generally accepted auditing standards and provides guidance concerning the representations to be obtained. Reliance on Management Representations

28. Letter of representation Management is responsible for the financial statements Management believes the f/s conform to GAAP All financial records have been made available All minutes have been made available Information concerning fraud or illegal acts Information concerning related party transactions Unasserted claims that are probable have been disclosed Subsequent events Page 489

29. Trevor Who prepares and signs the letter of client representations?

30. Mara we must obtain certain representations from management in writing what kind of problem do we have if the client refuses? what kind of report will we issue ?

31. Erin Is there an explanatory para? Where? What is the first sentence of the intro para? What is the first sentence of the scope para? What is the first sentence of the opinion para?

32. Bryan what is a “waived adjustment?” on page 493 “unadjusted misstatement audit schedule” “summary of possible misstatements”

34. Megan at what three stages of the audit MAY we perform Analytical Procedures ? at what stages of the audit are we required to perform Analytical Procedures?

35. req’d planning phase substantive tests req’d at conclusion as an overall review

36. AU Section 329 Analytical Procedures (Supersedes section 318) Source: SAS No. 56. Effective for audits of financial statements for periods beginning on or after January 1, 1989, unless otherwise indicated. .01 This section provides guidance on the use of analytical procedures and requires the use of analytical procedures in the planning and overall review stages of all audits. .02 Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by a study of plausible relationships among both financial and non financial data. Analytical procedures range from simple comparisons to the

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38. Contingent Liabilities / Attorney’s Letter Subsequent Events Management Representations analytical procedures Final assessment of audit risk - opinion communications to audit comm or mgmt • SAS 114 Communicating Internal Control Related Matters Identified in an Audit • SAS 112 Communication with Those Charged with Governance subsequent discovery of facts

39. Kevin K what is audit risk?

40. material aggregate likely misstatement estimated misstatements .05 0 known misstatement from samples projected uncorrected misstatements includes projected and estimated

41. final review of workpapers • all accounting and auditing questions have been resolved • support the auditor’s opinion • provide evidence the audit was in accordance with GAAS • means of coordinating and supervising the audit

42. Mrinal who is an “independent reviewer?”

43. dual dating events that occur between the end of field work (the report date) and the date the report is issued extend field work or dual date page 487

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47. Jeff what is control risk

48. control risk the probability that a company’s controls will fail to prevent or detect errors or frauds that would otherwise entered the system

49. Josh what is a material weakness?

50. material weakness (page 271 ) a significant deficiency that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis