ACCT3103L10 – Flashcards
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What are subsequent events occurring between the balance sheet date and the date of the auditor's report?
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They are transactions and events which might affect the financial statements being audited eg. adjustment/disclosure
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What are subsequent discovery of facts existing at the date of the auditor's report?
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Occurs when auditor becomes aware that some information included in the financial statements was materially misleading after the audited financial statements have been issued. eg. subsequent discovery of the inclusion of fraudulent sales Upon such a discovery auditor should request the client issue a revised set of FS containing a new audit report and explanation of reasons for the revisions.
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A principal purpose of a letter of representation from management is to: (1) serve as an introduction to company personnel and an authorisation to examine the records (2) discharge the auditor from legal liability for his or her examination (3) confirm in writing management's approval of limitations on the scope of the audit (4) remind management of its primary responsibility for financial statements.
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Remind management of its primary responsibility for financial statements
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The date of the management representation letter should coincide with the: (1) date of the auditor's report (2) balance sheet date (3) date of the latest subsequent event referred to in the notes to the financial statements (4) date of the engagement agreement.
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Date of the auditor's report
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The audit step most likely to reveal the existence of contingent liabilities is: (1) a review of vouchers paid during the month following the year-end (2) accounts payable confirmations (3) an inquiry directed to the client's lawyers (4) mortgage-note confirmation.
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An inquiry directed to the client's lawyers
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Management's refusal to furnish a written representation on a matter the auditor considers essential constitutes: (1) prima facie evidence that the financial statements are not presented fairly (2) a violation of the Corporations Act (3) an uncertainty sufficient to preclude an unmodified opinion (4) a scope limitation sufficient to preclude an unmodified opinion.
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A scope limitation sufficient to preclude an unmodified opinion.
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On 14 December 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 2 October 20X0. The sale had taken place on 15 April 20X0, but the amount appeared collectible at 30 June 20X0 and 19 August 20X0. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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No action is required The amount appeared collectible at the end of the fieldwork.
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On 15 August 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 1 August 20X0. The most recent sale had taken place on 2 April 20X9 and no cash receipts had been received since that date. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Occured in period 1 between the balance date and audit report date. Adjust the 30 June 20x0 financial statements
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c On 14 December 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 15 July 20X0, due to declining financial health. The sale had taken place on 15 January 20X0. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 3 - After financial report issued Request the client to recall the 30 June 20x0 statements for revision.
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On 6 August 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 30 July 20X0. The cause of the insolvency was an unexpected loss of a major legal action on 15 July 20X0, resulting from a product deficiency action by a different customer. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 1 - Between balance date and audit report date Because it is an UNEXPECTED LOSS of legal action it is a disclosure. Disclose the information in a footnote in the 30 June 20X0 financial statements
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On 6 August 20X0 the auditor discovered that a debtor of Tracy Brewing had been placed in liquidation on 30 July 20X0 for a sale that took place on 3 July 20X0. The cause of the insolvency was a main uninsured fire on 20 July 20X0. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 1 between the balance date and the audit report date. Disclosure by client in the notes to financial statements
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On 31 May 20X0 the auditor discovered an uninsured legal action against Tracy Brewing that had originated on 28 February 20X0. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 1 between the balance date and the audit report date Adjust the 30 June 20X0 financial statements
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On 20 July 20X0 Tracy Brewing settled a legal action out of court that had originated in 20X7 and is currently listed as a contingent liability. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 1 between balance date and audit report date Adjust the financial statements
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On 14 September 20X0 Tracy Brewing lost a court case that had originated in 20X9 for an amount equal to the legal action. The 30 June 20X0 footnotes state that in the opinion of legal counsel there will be a favourable settlement Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 3 After reporting date No action necessary
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On 20 July 20X0 Tracy Brewing settled a legal action out of court that had originated in 20X7 and is currently listed as a contingent liability. Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 1 between balance date and audit reporting date Adjustment to financial statements
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On 20 July 20X0 a legal action was filed against Tracy Brewing for a patent infringement action that allegedly took place in early 20X0. Legal advice suggested there is a danger of a significant loss to the client Which option should be performed: 1 Adjust the 30 June 20X0 financial statements. 2 Disclose the information in a footnote in the 30 June 20X0 financial statements. 3 Request the client to recall the 30 June 20X0 statements for revision. 4 No action is required.
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Period 1 between balance date and audit reporting date Disclose the information in a footnote in the 30 June 20X0 financial statements
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What are Contingent Liabilities
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A potential future obligation to and outside party for an UNKNOWN amount resulting form past activities. Main assertions of concern are completeness and disclosure.
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If a contingent liability is probable what action is required? If amount account be reliably estimated and if it can.
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If amount cannot be reliably estimated then a disclosure is required If amount can be reliably estimated then an adjustment to FS is required.
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What is the primary source of obtaining information concerning litigations and liabilities?
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A legal representation letter sent directly back to the auditor.
