Perform additional tests for presentation and disclosure - Review for contingent liabilities - Review for subsequent events (post balance sheet review) - Accumulate final evidence and evaluate results - Issue audit report - Communicate with audit committee and management correct answers Steps to co...
perform additional tests for presentation and disc
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CH. 24, 3 ACCT 5200 McCallen
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Perform additional tests for presentation and disclosure - Review for contingent liabilities -
Review for subsequent events (post balance sheet review) - Accumulate final evidence and
evaluate results - Issue audit report - Communicate with audit committee and management
correct answers Steps to complete the audit:
Contingent liability correct answers a potential future obligation to an outside party (or an
impairment of assets) for an unknown amount resulting from activities that have already taken
place
- Potential future payment to an outside party or the impairment of an asset that resulted from an
existing condition
- Uncertainty about the amount of the future payment or impairment
- Outcome will be resolved by some future event or events correct answers 3 requirements for a
contingent liability to exist: Ex. (lawsuit filed but not yet resolved)
- Probable - the future event is likely to occur
- Reasonably possible - the chance of the future event occurring is more than remote but less
than likely
- Remote - the chance of the future event occurring is slight correct answers Likelihood of
occurrence:
Prob: reflected in F/S if possible, otherwise footnote
Reas. Prob: Footnote disclosure
Remote: No disclosure correct answers How to disclose of each likelihood of occurrence:
Probable:
Reasonable probable"
Remote:
- Pending or threatening litigation
- Income tax disputes
- Product warranties or defects
- Notes receivable discounted
- Guarantees of obligations to others
- Unused balances of outstanding letters of credit correct answers Examples of likely contingent
liabilities:
- Evaluate accounting treatment of known contingent liabilities to determine whether
management has properly classified the contingency
- Identify to the extent practical any contingencies not already identified by management correct
answers 2 primary objectives in verifying contingent liabilities:
, Commitments correct answers Agreement to commit the firm to a set of fixed conditions in the
future (all are either included in a separate footnote or with contingencies)
- Determine whether any contingencies exist
- Read minutes of meetings of the board of directors, committees of the board, and stockholders
- Review contacts, loan agreements, leases, and correspondence, including income tax filings,
from government agencies
- Examine, analyze legal expense for the period
- Confirm or otherwise document guarantees and letters of credit
- Inspect other documents for possible guarantees or other similar arrangements
- Obtain, analyze legal letters from the client's attorneys correct answers Audit procedures for
identifying contingent liabilities
Inquiry of client's attorney correct answers letter from the client requesting that legal counsel
inform the auditor of pending litigation or any other information involving legal counsel that is
relevant to financial statement disclosure
Subsequent event correct answers One that occurs between the balance sheet date and the date on
the auditors' report
- Must review transactions and events occurring after the balance sheet date
- To determine whether anything occurred that might affect the presentation or disclosure of the
current-period F/S correct answers Procedures required for subsequent events:
Direct effect (type 1)
No direct effect (Type 2) correct answers Types of subsequent events: when subsequent event
happens, auditor must distinguish between
Direct effect (Type I) correct answers Conditions that existed at the balance sheet date, helps
determine presentation/disclosure of account balances as of the balance sheet date, if found a
material weakness auditor must give an adverse opinion, if nothing was found they have to
disclaim opinion on internal control,
Requires adjustment of F/S for effects of events
- Management in determining account balances as of B/S sheet
- Auditors in verifying the balances correct answers Event or transaction provides additional
information to:
- Auditors use subsequent litigation activity (recorded estimate of litigation liability at B/S date is
settled for an amount that is different) to provide information regarding contingent liabilities at
the B/S dateBankruptcy by a customer with an outstanding A/R balance due to deteriorating
financial condition
- Disposal of equipment not being used in operations at a price below the current BV
- Sale of held to maturity investments at a price below recorded cost
- Settlement of litigation at an amount different from the amount recorded at year end correct
answers Common examples of direct effect (type 1)
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