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BUA 310
Final
| Question | Answer |
|---|---|
| Once the financial statement accounts and related controls in each of the various business process have been audited the auditor: | Summaries and evaluates the evidence, Considers additional issues that could impact the financial statements |
| Review for contingent liabilities | existing condition or set of circumstances involving uncertainty about a possible lass that will ultimately be resolved when some future event occurs or fails to occur |
| Review for commitments | Future contracts |
| Subsequent events | Events after the audit report but before the financial statements are released |
| Final Eval of audit evidence | Quality control from an independent partner within the audit firm |
| Examples of contingent liabilities | Pending or threatened lawsuit Actual or possible claims and assessments Guarantees of obligations to others Income tax disputes Product warranties or defects Agreements to repurchase receivables that have been sold |
| Contingent liability is probable | Future event is likely to occur |
| Contingent liability is reasonably probable | Chance of future event is more than remote but less than likely |
| Contingent liability is remote | Chance of future event occurring is slight |
| Remote | No disclosure in Financial statements or footnotes |
| Probable - amount can be reasonably estimated | The loss is documented in the Financial statements reducing income, and disclosed in footnotes |
| Reasonably possible | Disclosure in the foot notes |
| Probable - amount can not be reasonably estimated | Disclosure in the foot notes |
| ABC company files a lawsuit against unlucky company for $500. Unlucky's attorney feels the suit is without merit | Probably - Disclose in foot notes |
| Several months later Unlucky's attorney advises to settle out of court for $100 - What journal entries should Unlucky make | DR. Legal expense 100 CR. Accrued Liabilities 100 |
| Several months later Unlucky's attorney advises to settle out of court for $100 - What classification is the contingent liability | Probable and estimable |
| Audit procedures for identifying contingent liabilities | Read minutes of meetings for board of directors Review tax returns, IRS reports Confirm guarantees and letter of credit |
| Near completion an auditor should take additional steps to identify contingent liabilities by - | Inquire and discuss with management regarding the entity's policies and procedures for evaluating and accounting for contingent liabilities Obtain a legal letter Examine documents in the entity's records |
| Legal letter | letter of audit inquiry sent to the entities attorneys as the primary means of obtained or corroborating information about litigation , claims and assessments |
| Refusal from an entity's attorney to furnish information in a legal letter | Limitation on the scope of the audit sufficient to prevent an unqualified opinion |
| What should be included in a legal letter | List of all pending or threatened suits - including progress, action taken, likelihood of unfavorable result, if possible estimate of loss. Any unasserted claims where the attorney's view differs from management evaluation Reason for evaluation if any |
| Commitments requirements | Disclosed in foot notes to the financial statements with adjustments to OCI for gains or losses |
| Commitment contract of 1 per pound for full, FMV is 1.25 | gain of .25 per pound of wool |
| Commitment contract of 1 per pound for full, FMV is .75 | loss of .25 per pound of wool |
| Audit procedures to identify commitments | Inquiry of entity personnel during the audit of the revenue and purchasing process Review board minutes |
| Subsequent Event Type 1 | Conditions that existed before the balance sheet date and affected estimates that are part of the financial statements |
| Type 1 | Requires adjustments to the financial statements |
| Subsequent Event Type 2 | Conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements |
| Type 2 | Requires disclosure and possibly pro forma financial statements |
| Examples of Type 1 | Noncollectable account due to bankruptcy of the customer Loss on disposal of equipment (sold below book value) Settlement of a lawsuit for a different amount than recorded. |
| Examples of Type 2 | Purchase or disposal of subsidiary business Sale capital stock or bond Loss of manufacturing facility or assets resulting from a casualty. Loss on receivables caused by conditions such as business failure arising subsequent to the balance sheet date |
| Dual Date | Original date of report plus date of subsequent event |
| Subsequent event | 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. |
| Options for Subsequent event | Dual Date Change the Date |
| Change the date | Of the auditors report to the date of the subsequent event |
| What limits the liability of a subsequent event | Dual Date |
| Audit procedures to look for subsequent events in Financial Statements | Inquiry of management Read minutes of meetings examine the books of original entry Read interim financial statements Inquire of legal counsel |
| When are analytical procedures required | at planning stave and evidence evaluation |
| Perform final analytical procedures objective | assess the conclusions reached on the financial statement components Evaluate the overall financial statement presentation |
| Representation letter from management purpose | Corroborate significant oral representations made by management to the auditor Document the continued appropriateness of those representations Reduce the possibility of misunderstanding between management and the auditor |
| first 4 final steps of evidence evaluation | 1. Perform final analytical procedures 2. Obtain management representation letter 3. Review working papers 4. Final evaluation of audit results |
| last 4 final steps of evidence evaluation | 5. evaluate financial statement presentation and disclosure 6. Obtain an independent review of the engagement 7. Archiving and retention 8. Evaluate entity's ability to continue as a going concern |
| Review of working papers | Engagement partner -> reviews working papers related to critical audit areas as well as working papers prepared by the manager -> Ensures the body of evidence gathered fully justifies and supports the audit opinion |
| Final evaluation of results potential issues | Was there sufficient evidence to support each assertion? Effects of detected misstatements in the financial statements |
| Detected misstatements | overall misstatement > materiality |
| Misstatements - adjusted by management | Unqualified Oppinion |
| Misstatements - not adjusted by management | Qualified or Adverse |
| 2 approaches for effect of prior year misstatements | The Iron Curtain approach Roll over approach |
| Iron Curtain | Quantifies the misstatements based on the amount required to correct the misstatement in the balance sheet at the period end regardless of the misstatements year of origination |
| Overall materiality 15,000 2017 Overall Misstatement 6,000 2016 Overall Misstatement 3,000 2018 Overall Misstatement 7,000 Total Overall Misstatement = 16,000 | Overall Misstatement 16,000 > 15,000 Materiality 1000 Adjustment needed |
| Roll Over | Quantifies the misstatement based only on the amount of the error that originates in the current year income statement. Ignores the carryover effects of prior years |
| If a misstatement is considered material to the financial statements either the "iron curtain" or the "rollover" approach then: | Financial statements need to be adjusted so that any remaining misstatement would be considered immaterial under either approach. |
| Auditor reviews the financial statements to ensure | GAAP compliance Proper presentation of accounts Inclusion of all necessary disclosures |
| Most audit firms require an engagement quality review | Publicly traded companies Privately held clients whose financial statements are expected to be widely distributed |
| Characteristics of an engagement quality review - reviewer | Independent of the engagement Be able to provide and independent and objective review Evaluate the significant judgement made by the engagement team and the conclusions reached in formulating the auditors report Discuss significant findings or issue |
| Characteristics of an engagement quality review - review partner | Read the financial statements and proposed auditors report Evaluate conclusions reached in formulating the auditors report Reviews selected audit documentation relating to significant judgment Consider if the proposed auditors report is appropriate |
| Archiving and retention of documents | Retained for 7 years from the date of completion of the engagement Archived for retention within 45 days following the time the auditor grants permission to use the auditors report in connection with the issuance of the company's financial statement |
| Auditor becomes aware that previously issued financial statements contain material misstatement due to either unintentional or intentional actions by management. What should the auditor do | Consult attorney for potential lawsuits Are the facts reliable and did they exist at time of audit Discuss with appropriate levels of management, if necessary those charged with governance Determine if Financial statements require restatement |
| Auditor becomes aware that previously issued financial statements contain material misstatement due to either unintentional or intentional actions by management. What should the auditor do if the effect on the financial statements cant be determined | Request that the entity notify persons known to be relying on the financial statements and the accompanying audit report. Contact the SEC, stock exchanges, and other regulatory agencies if the company is publicly traded. |
| Auditor becomes aware that previously issued financial statements contain material misstatement due to either unintentional or intentional actions by management. What should the auditor do if client refuses to make adjustments | Notify board of directors Notify the entity that the auditors report can not be associated with the financial statements Notify each party known to the auditor to be relying on the financial statements |
| Revenue recognition criteria | Evidence of an arrangement exists - ie Sales Invoice Delivery has occurred or services rendered - ie shipping document Sellers price to the buyer is fixed - ie price list/customer order Collectability reasonably assured - ie credit customers approved |
| Side agreements | Arrangements used to alter the terms and conditions of recorded sales in order to entice customers to accept delivery of goods and services |
| Channel Stuffing | Marketing practice commonly used by suppliers to boost sales by inducing distributors to buy substantially more inventory than they can promptly resell |
| Bill and Hold Sales | Sales where the customer agrees to purchase the goods. But the seller retains physical possession until the customer request shipments. |
| Related Party Transactions | Any transaction between the client and a relative, friend, organization management or board of directors has influence on |
| Four activities that are fraud risks | Side agreements channel stuffing bill and hold sales related party transaction |
| Key segregation of duties | Credit function separated from the billing function A/R function separated from the general ledger function Shipping function separated from the billing function Cash receipt function separated from the A/R |
| 4 factors that my affect he auditor's assessment of inherent risk for the revenue process | Industry-related factors Misstatements detected in prior audits Complexity and contentiousness of revenue recognition issues Difficulty of auditing transactions and account balances |
| Industry-related factors | Profitability and health of the industry Level of competition within the industry Industry rate of technological change |
| 5 components of internal control | Control environment Entity's risk assessment process Control activities Information systems and communication Monitoring of controls |
| What is the most important assertion in the revenue process | Occurrence |
| Type of audit tests | Risk Assessment Tests of control Substantive tests |
| Risk Assessment | analytical procedures |
| Tests of control | Inquiry observation re-performance walk-through |
| Substantive tests | Analytical procedures (optional but saves time) Test of detail |
| Accounting for the numerical sequence of sales invoices | Preventive - Review clients procedures for accounting for numerical sequences of sales invoices |
| Use of monthly periodic customer statements with complaints handled separately. | Review clients procedures for accounting, mailing and handling of customer complaints about monthly statements. Detective - Examine a sample of customer orders for evidence of credit approval |
| What is an exception | Difference between amount in books and amount customer states is owed. |
| Completeness assertion | auditors are less concerned about the completeness assertion for revenue transactions because clients are more likely to overstated sales |
| Auditor is concerned with the following potential misstatements | Good are shipped, but no revenue is recorded Services have been performed but no revenue is recorded |
| Occurrence is opposite of | completeness |
| Vouch | Occurrence |
| Trace | completeness |
| Reviewing journal record to sales invoices refers to what assertion | Occurrence |
| Reviewing journal sales invoices to journal record refers to what assertion | Completeness |
| Open-Order Document | an order was placed, approved, but is not yet delivered |
| CR low to medium allows for | a reliance strategy |
| reliance strategy | rely on controls to reduce test of details |
| CR high allows for | Substantive Strategy |
| Substantive Strategy | Controls are horrible |
| Negative confirmation can only be used for | very low risk accounts, small balances |
| Timing of confirmation | should be done at end of year |
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