Completing the Audit Chapter 23 Learning Objective

Transcript:Completing the Audit Chapter 23 Learning Objective:
Completing the Audit Chapter 23 Learning Objective 1 Conduct a review for contingent liabilities and commitments. Summary of the Audit Process Phase I Phase II Phase III Phase IV Plan and design an audit approach. Perform tests of controls and substantive tests of transactions. Perform analytical procedures and tests of details of balances. Complete the audit and issue an audit report. Phase IV – Completing the Audit Review for contingent liabilities Review for subsequent events Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. Contingent Liabilities Likelihood of Occurrence and Financial Statement Treatment Likelihood of Financial Statement Occurrence of Event Treatment Remote (slight chance) No disclosure necessary Reasonably possible Footnote disclosure Probable Adjust financial statements OR footnote disclosure Pending litigation for patent infringement, product liability, or other actions Income tax disputes Product warranties Notes receivable discounted Guarantees of obligations of others Unused balances of outstanding letters of credit Auditor’s Concerns Audit Procedures for Finding Contingencies Inquire of management (orally and in writing) about the possibility of unrecorded contingencies. Review current and previous years’ internal revenue reports for income tax settlements. Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits. Audit Procedures for Finding Contingencies Analyze legal expenses and review invoices and statements from legal counsel. Obtain a letter from each major attorney of the client as to the status of pending litigation. Examine letters of credit in force. Review audit documentation for any information that may indicate a potential contingency. Learning Objective 2 Obtain and evaluate letters from the client’s attorneys. A list including (1) pending threatened litigation and (2) asserted or unasserted claims or assessments with which the attorney has had involvement. A request that the attorney furnish information or comment about the progress of each item listed. Inquiry of Client’s Attorneys A request for the identification of any unlisted pending or threatened legal action or a statement that the client’s list is complete. A statement informing the attorney of the attorney’s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor. Inquiry of Client’s Attorneys Learning Objective 3 Conduct a post-balance-sheet review for subsequent events. Period Covered by Subsequent Events Review Client’s ending balance sheet date Audit