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55 Cards in this Set
- Front
- Back
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What does SAS 85 (Management Representations) require?
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Auditors must obtain management representations on matters of audit importance.
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What is required in the management representations of SAS 85?
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Must be:
- Written - Addressed to the auditor - Signed by the client's officers (CEO, CFO - normally) |
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When is the representation letter dated?
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The same date as the auditor's report: THE AUDIT COMPLETION DATE
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What are the purposes of the management representation letter?
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1. Impress upon management its primary responsibility for the financial statements
2. May establish auditors' defense if a question related to inquiries subsequently arises |
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What must be done if the client does not provide a representation letter?
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Results in a SCOPE LIMITATION that is sufficient to preclude an UNQUALIFIED OPINION and is ordinarily sufficient to cause an auditor to DISCLAIM AN OPINION or WITHDRAW FROM THE ENGAGEMENT.
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Reps rel to I/C: If client is subject to reqts of AS 5, what is included in additional representations?
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- Management has PERFORMED AN ASSESSMENT OF I/C
- Management's conclusion with respect to the operating effectiveness of its I/C - No subsequent changes in I/C that significantly affect I/C - No control deficiencies from prior engagements have not been properly resolved |
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What is the primary reason auditors request responses to attorney letters?
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To provide auditors corroboration of the information furnished by management about litigation, claims, and assessments.
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What is NOT required under generally accepted auditing standards?
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Management Letters
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What is a Type I event in subsequent events?
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Events that HAVE BEEN KNOWN FOR A WHILE. Events that provide additional evidence about conditions that existed at the balance sheet date and affect the estimates that are part of the financial statement preparation process.
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What do you do with the Type I event?
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ADJUST THE FINANCIAL STATEMENTS and/or DISCLOSURES to reflect new information (if material)
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Give examples of Type I events.
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- Loss on uncollectable receivable due to customer's bankruptcy
- Settlement of litigation for an amount different from that previously recorded (if litigation was pending at balance sheet due date) |
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What is a Type II event in subsequent events?
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UNFORSEEN EVENTS. Events that provide evidence about conditions that did not exist at the balance sheet date but that arose subsequent to that date.
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What do you do with the Type II event?
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- Disclose in financial statements (if material)
- Prepare pro forma financial statements (if VERY material) - present as if even had happened at beginning of period |
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Give examples of Type II events.
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- Loss on an uncollectable receivable IF customer suffers post-balance sheet loss due to flood or fire
- Bond or capital stock issuance - Loss of plant or inventory as a result of flood or fire - Purchase or Disposal of a business segment |
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What are audit procedures if events are found Prior to audit completion date?
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Perform audit procedures and ensure proper accounting treatment and disclosure.
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What are audit procedures if events are found following the audit completion date and Prior to audit report release date?
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1. Dual date audit report...... OR
2. Extend audit report date (Dual dating is used to limit auditor's legal liability) If you extend the report date, then you're responsible for the info. |
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What are audit procedures if events are found following audit report release date?
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Subsequent Discovery of Facts
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Who signs off on the Audit Documentation Review and When does this occur?
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Occurs BEFORE the Audit Completion date
1. Audit Supervisor 2. Audit manager and partner 3. Reviewing partner (outside the engagement team) |
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What are the audit documentation requirements for Public companies (AS 5) ?
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- Documentation completion date must be WITHIN 45 DAYS OF REPORT RELEASE DATE.
- Must retain documentation for 7 YEARS |
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What are the audit documentation requirements for Non-Public companies (SAS 103)?
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- Documentation completion date must be WITHIN 60 DAYS OF REPORT RELEASE DATE.
- Must retain documentation for 5 YEARS |
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What are the activities following the Audit Report Release Date?
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- Subsequent discovery of facts
- Omitted procedures - Communication with audit committee (or those charged with governance) - Management letters |
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What are Subsequent Discovery of Facts?
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These are facts found subsequent (after) to the AUDIT REPORT RELEASE DATE, the auditor may become aware of facts that existed at the audit report date which might have affected the report had the auditor known about them.
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In what cases do you require disclosure of events?
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1. Facts are reliable and existed at report date
2. Facts affect financial statements and auditors' reports 3. Persons are containing to rely on financial statements and auditors' reports |
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What does an auditor do if client refuses to disclose?
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Auditors should inform board that he/she will notify regulatory agencies (SEC) and others relying on the reports.
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What is a Going Concern Evaluation? (SAS 59) [you think it might be going bankrupt]
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Limits auditors' responsibility for evaluating the client's ability to continue as a going concern to a period of time not to exceed ONE YEAR beyond the date of the financial statements under audits.
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What are the indicators in a Going Concern Evaluation?
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- Negative trends in operating income
- Working capital deficiencies - Loss of key patent - Default on loan - Restructuring of debt - Changes in dividend policy - Work stoppages |
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How do you identify a subsequent event?
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1. Review latest interim financial statements
2. Make inquiries of officers and other executives (Contingent liabilities or commitments AND Significant changes in capital stock, long-term debt, or working capital) 3. Read minutes of meetings of shareholders, directors, and committees 4. Obtain responses to attorney letters 5. Obtain management representations |
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What is required of auditors in evaluating materiality? (SAS 108)
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Requires auditors to EVALUATE IDENTIFIED MISSTATEMENTS using BOTH of the following methods:
1. ROLLOVER METHOD = considers the current period income effect(s) of misstatements 2. IRON CURTAIN METHOD = considers the aggregate effect of the adjustments on the entity's balance sheet (SAS 108 requires ADJUSTMENTS TO BE PROPOSED if material under either approach) |
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What is required of auditors under SAS 114 in adjusting journal entries when evaluating materiality?
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SAS 114 requires that auditors COMMUNICATE (TO THE AUDIT COMMITTEE) all adjustments and misstatements detected during the audit (regardless of materiality)
(REMEMBER that a material error, which requires an adjusting journal entry) is a strong indicator that a material weakness exists) |
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How are omitted procedures identified?
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Through EXTERNAL REVIEW PROCEDURES (e.g., peer reviews, PCAOB reviews)
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When should auditors perform omitted procedures?
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- If additional testing CANNOT BE USED TO SUBSTITUTE for the omitted procedures
- if omitted procedures ARE IMPORTANT in supporting the opinion - if individuals are CURRENTLY RELYING ON F/S AND AUDITORS' REPORTS |
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In omitted procedures, what happens if previous opinion can be supported after performing the procedures?
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No further action necessary
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If omitted procedures are performed, if previous opinion cannot be supported, what happens?
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- Withdraw the original report
- Issue revised reports - Inform persons currently relying on the financial statements |
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Are Management letters requried under GAAS?
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NO
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Why are management letters prepared?
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Are prepared as a by-product of procedures performed in audit.
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What do management letters provide?
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They provide RECOMMENDATIONS TO CLIENT for improving EFFECTIVENESS AND EFFICIENCY of operations
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Who are management letters delivered to and When?
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Delivered BY AUDITORS to CLIENT .... AFTER AUDIT ENGAGEMENT
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Define CONTINGENCIES.
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States that when a contingent liability exists, the likelihood that the future event will result in a loss is to be assessed using three categories:
1. Probable 2. Reasonable possible. 3. Remote. |
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Define Contingent liability.
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An existing condition or set of circumstances involving uncertainty about a possible loss that will ultimately be resolved when some future event occurs or fails to occur.
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What is the Audit Completion Date?
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Date when auditors have GATHERED SUFFICIENT APPROPRIATE EVIDENCE on which to base their opinion -- this includes the REVIEW OF AUDIT DOCUMENTATION, PREPARATION OF THE F/S and related disclosures, and obtaining management representations.
(Also the OPINION DATE - date on the auditor's report) |
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What is the Audit Report Release Date?
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Date on which auditors ALLOW THE CLIENT TO USE THE AUDITORS' REPORT -- for large accelerated filers, MUST BE WITHIN 60 DAYS OF FISCAL YEAR-END
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What does GAAP require of material contingencies?
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To be PROPERLY ACCOUNTED FOR AND DISCLOSED
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What type of contingency are auditors more concerned about?
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LOSS CONTINGENCIES because they have a negative impact on financial results. Examples are:
- Warranty liabilities - IRS tax disputes - Pending or threatened litigation |
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What are the sources of information in Contingencies?
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1. Search for UNRECORDED LIABILITIES
2. LEGAL LETTERS 3. INQUIRY OF CLIENTS 4. REVIEW MINUTES OF MEETINGS OF STOCKHOLDERS, DIRECTORS, AND COMMITTEES 5. REVIEW CONTRACTS, loan agreements, and correspondence from tax and gov't agencies 6. OBTAIN INFO about guarantees from bank conformations 7. REVIEW DOCUMENTATION related to LEGAL SERVICES |
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What is the purpose of the LEGAL LETTER?
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CORROBORATE ORAL REPRESENTATIONS made to the auditor and to DOCUMENT THE CONTINUED APPROPRIATENESS of those representations. Also reduces the possibility of misunderstanding between management and the auditor.
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What is the auditor's responsibility in a legal letter?
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TO INITIATE REQUEST FOR ATTORNEY LETTER
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What does an auditor need to do if a lawyer refuses to respond to a Legal Letter?
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Auditor should CONSIDER THE REFUSAL A SCOPE LIMITATION
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What is the general contents of a management representation letter?
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Anything that has been told to the auditor or given to the auditor in writing regarding the financial statements and internal control of the entity.
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What is the purpose of Dual Dating of Audit reports?
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Dual dating an audit report provides a means of inserting important information in the financial statements and footnote disclosures learned by the auditor after the last day of fieldwork. A significant advantage of dual dating the report is that the auditor’s liability for events after the last day of fieldwork is limited to the event specifically identified in the report date.
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What are the implications of dual dating for auditors' responsibilities?
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The auditor is responsible for whatever date they put down.
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What are the purposes of Audit Documentation Review (at various levels of review)?
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1. Audit supervisor - makes sure that all steps of audit have been performed and everything in the documentation is clear and understandable
2. Audit manager and partner - makes sure that the overall scope of audit is adequate and that conclusions support the opinion 3. Reviewing partner (outside the engagement team) - makes sure the quality of auditing work and reporting are consistent with quality standards of the firm. |
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What is Subsequent Discovery of Facts?
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Information that the auditor became aware of AFTER THE AUDIT REPORT RELEASE DATE which might have affected the report had the auditor known about them.
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How should auditors respond to Subsequent Discovery of Facts?
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Must REQUIRE DISCLOSURE OF EVENTS IF:
1. Facts are reliable and existed at REPORT DATE 2. Facts affect FINANCIAL STATEMENTS and AUDITORS' REPORTS 3. Persons are continuing to rely on FINANCIAL STATEMENTS AND AUDITORS' REPORTS |
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How should auditors respond to Discovery of Omitted Audit Procedures if it is determined that certain audit procedures have not been performed?
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These are typically identified through the EXTERNAL REVIEW PROCESS (peer reviews, PCAOB reviews)
If omitted procedures have been performed and if previous opinion cannot be supported, then: - WITHDRAW THE ORIGINAL REPORT - ISSUE REVISED REPORTS - INFORM PERSONS currently relying on the FINANCIAL STMTS |
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What if client refuses disclosure in a Subsequent Discovery of Facts?
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Auditors should INFORM BOARD THAT HE/SHE WILL NOTIFY REGULATORY AGENCIES (SEC) and others relying on the reports
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