Week 7-1

Question 1

Audit completion

Answer 1

• Contingent liabilities
  o Board minutes, confirmations, lawyers letter
• Subsequent events (events between year-end and audit report date)
• Accumulate evidence
  o Final analytical procedures, going concern, lawyers’ letter
• Evaluate results
• (Report)

Question 2

Contingent liabilities

Answer 2

• A potential future obligation to an outside party for an unknown amount resulting from activities that have already
  taken place.
  o Likely and reasonably estimated  accrual (in the general ledger and numbers)
  o Likely and not estimable  footnote disclosure
  o Not determinable  footnote disclosure
  o Unlikely  non-financial statement or disclose unless significant adverse effect

Question 3

Lawyers letter

Answer 3

• Auditing standards require that the auditor seek direct communication with the entity’s external legal counsel
• Counsel do not want to respond due to client confidentiality and attorney client privilege concerns
• Solution: the auditor should ask the client to prepare a letter (on client letterhead, signed by a client officer) asking the
  lawyer to respond directly to the auditor about various matters

Question 4

Subsequent events

Answer 4

Subsequent events are events or transactions having a material effect on the financial statements that occur after the
balance sheet date but before audit report date.
o Adjust:
 Events that provide additional evidence about conditions that existed at the balance sheet date
o Disclose (For example: COVID19)
 Events that occur after the balance sheet date and do not relate to conditions that existed at year-end

Question 5

Final analytical procedure

Answer 5

• Consider the adequacy of evidence
• Unusual or unexpected balances/relations
• Unusual items not previously identified
• Quality of earnings
• Significant accounting policies
• Benchmarking

Question 6

Going concern

Answer 6

• The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a
  going concern
• If there is such a concern, even if it is properly disclosed in the notes to the financial statements, the auditor must draw
  attention to it in an emphasis of matters paragraph after the opinion
• Steps:
  o Obtain management’s assessment of its going concern likelihood and supporting analyses (if any)
  o Consider evidence that indicates that a going concern problem may exist
  o Evaluate management’s plan to mitigate the identified conditions
  o Determine if management’s plan is adequate and appropriate for the circumstances and asses the likelihood
  that the company will suffer financial distress

Question 7

Representation letter

Answer 7

• The auditor obtain letter from the client documenting the client’s representations during the engagement
• The primary purposes are to
  o Confirm and document oral statements
  o Document management of responsibilities
  o The letter should be signed by the client CFO and CEO and dated as near as possible to audit report date (date
  F/S accepted by those charged with governance in a GAAS audit)
  o If the client refuses to give the auditor a representation letter, the auditor should qualify or deny the opinion

Question 8

Skepticism on client-auditor negotiation – Brown-Lburd, cohen (2013)

Answer 8

It seems that skepticism or differences in skepticism effect auditor client negotiation outcomes, theoretically this should not be
the case.
Cost is that biases in the judgment and decision making of the auditor.