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28 Cards in this Set
- Front
- Back
Contingent Liability
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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
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What are the three conditions required for a contingent liability to exist
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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 |
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one of the auditors primary concerns related to the presentation and disclosure related objectives is.....
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Determining whether management has disclosed all required information
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Commitment
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Agreements to purchase raw materials or to lease facilities at a certain price, royalty agreements, profit sharing and pension plans
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What is the most important characteristic of a commitment
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The agreement to commit the firm to a set of fixed conditions in the future
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What are some audit procedures for finding contingencies
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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 |
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If auditors conclude that there are contingent liabilities what do they have to do
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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 |
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Attorney's should communicate about...
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Contingencies up to approximately the date of the auditors report
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What are the two categories of the refusals by attorney's to provide auditors with complete information about contingent liabilities
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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 |
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Unasserted claim
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Violation of a patent agreement that could result in a significant loss to the client if it were known (2nd category of refusal)
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Highlights of standard letter to attorneys
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Request to communicate about contingencies up to approximately the date of the audit report
Mailed sufficiently early in the audit process |
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Sarbanes-oxley act rules for attorneys
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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
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American Bar Association rule
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Amended its attorney-client confidentiality rules to permit attorneys to breach confidentiality if a client is committing a crime or fraud
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Review for subsequent events
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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.
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Two types of subsequent events
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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 |
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What subsequent period events require an adjustment of current years financials if the amounts are material
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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 |
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If auditors conclude that subsequent events reflect a material weakness that existed at year end, what opinion must they issue on internal control
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Adverse Opinion
If the events were subsequent to year end then the auditor must include an explanatory paragraph or direction to the disclosure |
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Events or transactions that may require disclosure instead of an adjustment
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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 |
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What are the two categories of audit procedures for the subsequent events review
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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) |
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what should an auditor do if journals are not kept up to date
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Review documents that will be used to prepare the journals
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What specific audit tests can be used to search for subsequent events
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Inquire of management
Correspond with attorneys Obtain a letter of representation Examine minutes issued subsequent to balance sheet date Review records Review internal statements |
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When does a dual dated audit report occur
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In the very unusual situation when a subsequent event occurred AFTER the field work was completed but BEFORE the audit report was issued
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What two options does the audito have when a subsequent event occurs after field work was completed but before issuance of the audit report
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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) |
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Letter of representation
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Documenting managements most important oral representations made during the audit (letter us mandatory and includes discussions about subsequent events and other related matters)
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What are the purposes of the management representation letter
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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 |
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Categories of specific matters for management representation letter
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Financial statements
Completeness of information Recognition, measurement, and disclosure Subsequent events |
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What two types of opinions are allowed in an auditors statement about information accompanying basic financial statements
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Positive opinion indicating a high level of assurance
Disclaimer indicating no assurance |
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Issue the Audit report
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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
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