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Auditing ch solutions Paper

Explain the purpose of lawyers’ letters and how they are used at the completion stage of an audit to identify any contingencies. Explain why written management representations are obtained, and he items generally included in the representation letter including identification of related parties. Given a set of facts and circumstances, classify a subsequent event by type and proper treatment in the financial Statements, and outline the implications of the timing of discovery Of the event for the auditors report.

Explain the final steps for overall review and evaluation of audit evidence documented in the working papers, adjusting entries resulting from the audit, engagement quality control and how professional judgment is applied to form the audit opinion. Summarize the auditors communications throughout and at he conclusion of the engagement. Apply and integrate the chapter topics to design audit procedures for detecting misstatements due to error or fraud at the overall completion stage of the audit.

Vouching supporting documents for expense entries to obtain detail evidence bout existence/occurrence, valuation, and classification. ‘k Documents vouched in connection with detail test of controls procedures, if any, performed in the acquisition and expenditure cycle test of controls work. “Unusual revenue transactions” can cause significant audit evidence and reporting problems when such transactions are designed by management to create inappropriate earnings. These transactions pose a combination Of: featherbedding problems, auditor responsibility for detecting errors and irregularities, and reporting-disclosure problems. 5. 5 The results of the overall analytical procedures help the auditor incorporate all hey learned in the course of the collecting the audit evidence to form the final conclusions on fair presentation of the financial statements. The final analysis procedures can be similar to those for risk assessment; for example, comparing financial and nonofficial data and examining ratios and trends that may indicate unexpected relationships, However, by performing this analysis at a late stage in the audit, the auditors have the benefit to considerable knowledge about the attitude’s business.

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The audit findings give the auditor a better basis to form expectations about the financial statement relationships, increasing the heir chances of noticing something out of line, The final analysis can be sharper and more focused on finding potential misstatements than the preliminary risk assessment was, The final analysis differs from analysis used to obtain substantive evidence by being directed at the financial statements overall rather than targeted at specific assertions for accounts or transactions. 156 The verification Of the cash flow statement is primarily by analysis.

Because it explains the major changes in balance sheet accounts and provides a bridge between the balance sheet and the income statement (when the indirect teeth is used) the information in the cash flow statement should tie into audits of other balances; for example, cash flows for both additions to and proceeds of disposal of fixed assets should tie in to information in the audit working papers on fixed assets, and changes in long-term debt or share capital should tie in to the financing cash flows reported, and reconciling items between net income and cash from operations should tie in to income statement information. 5,7 This statement in a letter from attitude’s lawyer is permissible (the lawyer is not refusing to cooperate) from the auditor’s viewpoint. However, it will not affect the auditors opinion directly since there is no indication of the character of the lawyers response with respect to litigation for which she or he is legal counsel. 15. 8 In addition to the letter, other procedures that are used to gather evidence regarding contingencies include: Standard bank confirmation. Inquiry of audited management. Reading of the minutes of the board of directors.

Vouching to purchase and sales contracts. Vouching to lease agreements, confirmation with lesser or lessee. 15. 9 Companies and auditors might experience difficulty making appropriate closures about litigation contingencies tort these reasons: High level of emotion surrounding the lawsuits. Fear that financial statement disclosure will be construed as an admission of guilt. The legal framework for evaluating litigation outcomes varies significantly from the framework used by auditors. More visible channels exist for disclosure Of litigation information (e. G. , business press). 5. 10 The primary purpose of the management representation letter is elicit acknowledgment from management in writing Of its ultimate responsibility for the adequacy of the financial statements and related disclosures. It also confirms management’s assertion that uncorrected misstatements will not have material impact on the financial statements. 15. 11 With respect to receivables, such letters typically state that all receivables are valid and include proper amounts; also stated is the amount written off in the past year and the current provision for noncombustible.

In connection with inventories, the audited represents that the dollar amount of inventories reflects physical quantities determined by a count and priced by a stated accounting method, The audited also represents that provision has en made by the company for all obsolete and damaged inventory. In regard to minutes, the audited represents that all minutes of meetings of shareholders, directors, and executive committees which have been transmitted to the auditor are complete and authentic records for the period under audit (including the subsequent period).

The audited should state whether any events occurred subsequent to the date of the financial statements that, in the attitude’s opinion, require adjustment or disclosure in the statements. I S. 12 Written representations and lawyers’ letters are obtained near the end of he audit favor and dated on or near the audit report date because the auditors are responsible for determining whether important events that occurred after the balance sheet date are properly entered in the accounts or disclosed in the financial statement notes. Copyright C 2010 McGraw-Hill Reason Ltd. 5. 13 There are two types of subsequent events: The first type consists of those events that provide additional evidence with respect to conditions that existed at or prior to the balance-sheet date and affect the estimates and balances inherent in the process of preparing financial statements. The use of the evidence requires an adjustment to the financial statements. The second type consists of those events that provide evidence with respect to conditions that did not exist at the date of the balance sheet being reported on but arose subsequent to that date.

These events should not result in an adjustment of the financial Statements. However, disclosure may be required to prevent the financial statement from being misleading. In some cases, pro form financial statements may be required to ensure adequate disclosure. IS. 14 If stock dividends or splits occur in the subsequent period, they are given attractive recognition. That is. The financial statements are adjusted. Retroactive recognition is given since, by the time the statements reach users, the stock dividend or split may have been affected, and to report financial data as if it had not occurred might be considered misleading. 5. 15 Dual dating the audit report is used: (1) To provide a means of inserting important information in the financial statements even when the related event occurred after audit report date, while at the same time (2) to inform users that the auditor takes full responsibility for subsequent events only up to the end f the audit report date and for the specifically identified later event, but does not take responsibility for other events which may have occurred after the audit report date and before the date of the specifically identified subsequent event.

IS 16 “Subsequent events” are material events that occur after the balance sheet date but before the audit report date that require disclosure in the financial statements and related notes. Auditors (and management) are responsible for gathering evidence on these subsequent events and evaluating the proposed disclosure. Subsequent discovery of facts existing at the audit report date” is knowledge aimed after the audit report is issued about an event or condition that existed at the audit report date. Auditors have no responsibility to search for these facts (as they do for subsequent events); however, once brought to the auditors’ attention, their responsibility is to determine if the financial statements (and thus their report) are misstated and take appropriate action. 15. 7 The actions the auditor should take if the audited consents to disclose the information (which existed at the audit report date and materially impacts the financial statements) is to determine the method and timing of disclosure, The actions the auditor would take if the audited refuses to make disclosure are: Notify the audited that the auditors’ report must no longer be associated with the financial statements. Notify regulatory authorities that the auditors’ report should no longer be relied upon.

Notify users known to be relying on the financial statements that the auditors’ report should no longer be relied upon. For publicly listed entities, such notification may be to the security market regulators and the stock exchanges. 15. 18 Once auditors have reported on audited financial statements, they have no responsibility to carry out a retroactive review of their work. However, postposition review may be made in connection With a firm’s internal engagement quality control monitoring program, peer review or otherwise, and the omission Of an auditing procedure may be discovered.

In general, if an omitted procedure is found, the auditors should consult legal counsel and take the following actions: Assess the importance of the omitted procedure to the present ability to support the previously expressed opinion, Determine if there are persons currently relying or likely to rely on their report. Fifth omitted procedure impairs present ability to support the previously expressed opinion, the omitted procedure should be applied or alternative procedures applied that would provide a satisfactory basis for the opinion.

If, as a result of subsequent application of the omitted procedure or alternative procedures, the auditors become aware of facts that existed at the date of their report, they should refer to professional auditing standards for guidance In this case the omitted procedure caused the auditor to fail to discover a material understatement of liabilities. Assuming they had previously provided an unqualified audit opinion on this matter, the new information would make heir previous report inappropriate, since the financial statements are materially misstated.

The auditor would need to notify the audited that the financial statements need to be recalled and restated to reflect the additional loan, and a new audit report on them issued. Fifth audited refuses Copyright @ 2010 McGraw-Hill Reason Ltd. To recall and correct the financial statements, the actions required are: * Notify the audited that the auditors’ report must no longer be associated with Notify users known to be relying on the financial statements that the auditors’ report should no longer be relied upon.

For publicly listed entities, such IS, 19 Recommended adjustments and note disclosures may be written by the auditors, but the audited must take primary responsibility for the financial statement numbers and disclosures The auditor’s responsibility is for the audit report and not for the financial statements. ISIS Uncorrected misstatements are those that are known or estimated by the auditor to exist based on the audit evidence obtained. They exclude misstatement discovered that the audited management has approved and adjusted in the company’s financial statements. Uncorrected misstatements an be classified into known, likely and possible further categories. Known misstatements are those actually found during the audit, so there is no uncertainty about their existence. Likely misstatements are those that probably exist based on audit evidence examined, such as the projected effect of misstatements identified in representative samples, or management accounting estimates or policy choices that the auditor considers unreasonable.

Further possible misstatements are those that could possibly exist CNN. ‘re and above the sum of identified and likely misstatements because of the fundamental limitations of auditing, such s sampling and non-sampling risks (as discussed in Chapter 10), forecasting uncertainties in accounting estimates, and minimum review accounts (those subjected to minimal ventilation as they have a very low assessed risk of misstatement).

Even though amount of further possible misstatement cannot be precisely quantified, the auditor must exercise professional judgment in addressing this possibility, particularly when the sum of identified and likely misstatement approaches materiality, or when misstatements appear to be due to general control breakdowns rather than isolated instances.

However, it is unlikely that attitudes will adjust for amounts estimated by the auditor as likely or further possible misstatements, because these amounts are not substantiated. The uncorrected misstatements can be compared to the materiality level set for the audit to evaluate whether the financial statements are materially misstated. 15. 1 To form an opinion on whether the financial statements are presented fairly, in all material respects, in accordance With GAP, the auditor uses professional judgment to: ; decide Whether the audit team has obtained sufficient appropriate audit evidence that provides reasonable assurance about whether the financial tenements as a Whole are free from material misstatement due to fraud or error ; decide if any uncorrected misstatements are material, either individually or in aggregate. consider the results of the final overall financial statement analysis to assess whether the overall presentation, structure, and content of the financial statements and notes represent the underlying transactions and events fairly from the perspective of users ; decide whether the information presented in the financial statements is relevant, reliable, comparable, and understandable ; decide whether the financial statements adequately disclose the significant accounting policies selected and applied so that users can understand the effect of material transactions and events on the information in the financial statements, including whether the terminology used and the titles of financial statements are appropriate and understandable ; assess the qualitative aspects Of the accounting used, including indicators of possible management bias in selecting accounting policies and making accounting estimates 15. 22 Review “to do” lists are notes about unfinished or deficient audit work that arise from reviews Of the audit working papers. The are used to facilitate implosion of outstanding work that is required to complete the audit programs and to document the working paper review process. A good reason for keeping the “to do list” in the audit working paper files is to show evidence of careful review and completion of the audit. 15. 23 In an engagement quality review,” a second partner not otherwise associated with an engagement will take the report (in draft copy) and all working papers and review the entire engagement with a fresh view.

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