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BUA 310


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
Created by: 2945671515458791
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