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To which of the following matters would materiality limits not apply in obtaining written management representations? The availability of minutes of shareholders’ and directors’ meetings. Materiality does not apply to representations not directly related to amounts in the financial statements. The availability of minutes of shareholders’ meetings and directors’ meetings is independent of amounts in the financial statements. Thus, materiality limits do not apply. The primary reason an auditor requests letters of inquiry be sent to a client’s legal counsel is to provide the
auditor with Corroboration of the information furnished by management about litigation, claims, and assessments. A letter of inquiry to a client’s external legal counsel is the auditor’s primary means of corroborating information furnished by management about litigation, claims, and assessments. If in-house legal counsel is primarily responsible for the entity’s litigation,
claims, and assessments, the auditor should send a similar letter of inquiry to in-house legal counsel. But the letter to in-house legal counsel is not a substitute for direct communication with external legal counsel. A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate’s external counsel to identify any pending and/or unasserted claims against Paper Plate.
The CPA received a letter from the external counsel with the following response: “We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured 2 years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2
million.” Should the CPA accept the letter from the external counsel? Yes, even though the CPA did not get a specific amount of loss. No specific amount of loss is required. The external counsel believes the possibility is remote that the company will suffer any damages. The
appropriate date for the client to specify as the effective date in the audit inquiry to legal counsel is As close to the date of the auditor’s report as possible. The date of legal counsel’s response should be as close to the date of the auditor’s report as practicable. The auditor is concerned with events occurring through the date of the report that may require adjustment
to, or disclosure in, the financial statements. The date of the report is the date on which the auditor obtained sufficient appropriate audit evidence on which to base the opinion. Moreover, the auditor should specify the earliest acceptable effective date of the response and the latest date by which it is to be sent to the auditor. A 2-week period between these dates generally suffices. An
auditor should obtain written representations from management about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by Management and the auditor. Management’s representations may be
limited to matters that are considered individually or collectively material if management and the auditor have reached an understanding about materiality. Such limitations do not apply to certain representations not directly related to amounts in the financial statements, e.g., acknowledgment of responsibility for fair presentation, availability of records, and fraud involving management and persons with significant roles in internal control. Subsequent to the issuance of the financial statements, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts The auditor most likely should Determine whether persons are relying or likely to rely on the financial statements
who would attach importance to the information. If the financial statements have been issued, they have been made available to third parties, along with the auditor’s report. Accordingly, the auditor should (1) discuss the matter with management (and, possibly, those charged with governance); (2) determine whether the statements need revision; and (3) if so, inquire how management intends to address the matter. To determine whether revision is needed, the auditor considers (1) the
applicable reporting framework and (2) whether persons are currently relying or likely to rely on the statements who would attach importance to the subsequently discovered facts (AU-C 560). Which of the following factors should an auditor consider most important upon subsequent discovery of facts that existed at the date of the audit report and would have affected the report? The client’s willingness to issue revised financial statements or other disclosures to persons known to be relying on the financial statement. If a subsequently discovered fact becomes known to the auditor, the auditor should (1) determine whether the financial statements need revision, (2) inquire how management intends to address the matter, and (3) determine whether management is willing to issue revised financial statements. A written management representation letter is most likely to be an auditor’s best source of corroborative information of a client’s intention to Discontinue a line of business. Written management representations complement, but do not substitute for, other auditing procedures. However, the plan for discontinuing a line of business is an example of a matter about which other procedures may provide little evidence. Accordingly, the written representation may be necessary as confirmation of management’s intent. Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit? The entity estimated the amount of a claim with a probable adverse outcome before issuance of the audit report. A loss contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that ultimately will be resolved when one or more future events occur or do not occur. A material contingent loss must be accrued (debit loss, credit liability or asset valuation allowance) when two conditions are met. Based on information available prior to the issuance (or availability for issuance) of the financial statements (and therefore the auditor’s report issued with the statements), accrual is required if (1) it is probable that, at a balance sheet date, an asset has been impaired or a liability has been incurred and (2) the amount of the loss can be reasonably estimated. Key Co. plans to present comparative financial statements for the years ended December 31, Year 1 and Year 2, respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative financial statements on May 1, Year 3. Key’s current management team was not present until January 1, Year 2. What period of time should be covered by Key’s management representation letter? January 1, Year 1, through May 1, Year 3. The auditor is concerned with events occurring through the date of his or her report that may require adjustment of, or disclosure in, the financial statements. Thus, the representations should be made (1) as of a date no earlier than the date of the auditor’s report and (2) for all periods referred to in the report. Moreover, if current management was not present during all periods covered by the auditor’s report, the auditor should nevertheless obtain written representations from current management for all such periods (AU-C 580). To which of the following matters would materiality limits not apply when obtaining written client representations? Instances of fraud involving management. Management’s representations may be limited to matters that are considered individually or collectively material if management and the auditor have reached an understanding about the limits of materiality. Such limitations do not apply to certain representations not directly related to amounts in the financial statements, e.g., acknowledgment of responsibility for fair presentation, availability of records, and knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees with significant roles in internal control, or (3) others if the fraud could materially affect the statements (AU-C 580). Which of the following is not an audit procedure that the auditor performs with respect to litigation, claims, and assessments? Confirm directly with the client’s legal counsel that all claims have been recorded in the financial statements. Legal counsel’s expertise does not extend to accounting matters. Legal counsel evaluates whether claims may be asserted and the likelihood and magnitude of the outcomes. These evaluations bear upon accounting and reporting decisions, for example, whether disclosure only or recognition of a contingent liability is required. But all claims do not necessarily require recognition, and legal counsel does not have information about the content of financial statements that have not been issued. Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern? Confirming with third parties the details of arrangements to maintain financial support. The procedures typically employed to identify going-concern issues include (1) analytical procedures, (2) review of subsequent events, (3) review of compliance with debt and loan agreements, (4) reading minutes of meetings, (5) inquiry of legal counsel, and (6) confirmation with related and third parties of arrangements for financial support. The scope of an audit is not restricted when legal counsel’s response to an auditor as a result of a client’s letter of inquiry limits the response to Matters to which the legal counsel has given substantive attention in the form of legal representation. Two limitations on an entity’s external legal counsel’s response are not scope limitations. The response may be limited to matters to which the legal counsel has given substantive attention in the form of legal consultation or representation. Also, the response may be limited to matters that are individually or collectively material, such as when the entity and the auditor have agreed on materiality limits, and management has stated the limits in the letter of inquiry. After releasing the auditor’s report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless New information is discovered concerning undisclosed related party transactions of the previously audited period. After the date of the auditor’s report, the auditor is not required to perform any further audit procedures with respect to the audited financial statements. However, facts may be discovered by the auditor after the date of the report that, if known at that date, might have caused the auditor to revise the report. In this case, the auditor should (1) discuss the matter with management and (2) determine whether the statements should be revised and, if so, how management intends to address the matter in the statements (AU-C 560). Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and events, Davis most likely will consider, as a mitigating factor, Hill’s plans to Negotiate reductions in required dividends being paid on preferred stock. Once an auditor has identified conditions and events indicating that a substantial doubt exists about an entity’s ability to continue as a going concern, the auditor should consider management’s plans to mitigate their adverse effects. The auditor should consider managerial actions relating to plans to (1) dispose of assets, (2) borrow money or restructure debt, (3) reduce or delay expenditures, and (4) increase equity. Plans to negotiate reductions in required dividends being paid on preferred stock are intended to increase ownership equity. After the date of the report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless Information, which existed at the report date and may affect the report, comes to the auditor’s attention. Although the auditor may need to extend subsequent events procedures when issuers make filings under the Securities Act of 1933 (AU-C 925, Filings with the U.S. Securities and Exchange Commission Under the Securities Act of 1933), (s)he ordinarily need not apply any procedures after the date of the report. However, facts may be discovered by the auditor after the report release date that, if known at that date, might have caused the auditor to revise the report. In this case, the auditor should (1) discuss the matter with management and (2) determine whether the statements should be revised and, if so, how management intends to address the matter in the statements (AU-C 560). Some subsequent events provide evidence of conditions not in existence at the balance sheet date. Under U.S. GAAP, some of these events are of such a nature that disclosure is required to keep the financial statements from being misleading. Adequate disclosure of these events may include Pro forma financial statement presentation. Under U.S. GAAP, subsequent events related to conditions that did not exist at the date of the balance sheet should not result in adjustments of (recognition in) the financial statements. These events are disclosed, if necessary, to keep the financial statements from being misleading. Occasionally, such an event may be so significant that disclosure can best be made by means of pro forma financial data. Such data make the event seem as if it had occurred on the date of the balance sheet. In some cases, U.S. GAAP suggest presentation of pro forma statements, usually a balance sheet only, in columnar form on the face of the historical statements. But firms usually incorporate the pro forma balance sheets in notes. Which of the following statements about litigation, claims, and assessments extracted from a letter from a client’s legal counsel is most likely to cause the auditor to request clarification? “I believe that the action can be settled for less than the damages claimed.” The letter of inquiry requests, among other things, that legal counsel evaluate the likelihood of pending or threatened litigation, claims, and assessments. It also requests that legal counsel estimate, if possible, the amount or range of potential loss. Thus, the auditor is concerned about the amount of the expected settlement as well as the likelihood of the outcome. The statement that the action can be settled for less than the damages claimed is an example given in AU-C 501 of an evaluation that is unclear about the likelihood of an unfavorable outcome. “We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage most likely is from a(n) Management representation letter. Written representations are written statements by management provided to confirm certain matters or to support other audit evidence. They do not include financial statements, the assertions in them, or supporting books and records (AU-C 580). Among other things, the auditor should request a representation about compliance with laws and regulations. Which of the following matters would materiality limits not apply in obtaining written management representations?To which of the following matters would materiality limits not apply in obtaining written management representations? The availability of minutes of shareholders' and directors' meetings. Materiality does not apply to representations not directly related to amounts in the financial statements.
Which of the following are not included in a management representations letter written representations of management )?Which of the following are not included in a management representations letter (written representations of management)? Management's acknowledgement that it has fulfilled its responsibility for the audit of the financial statements in accordance with the applicable audit framework.
Which of the following statements ordinarily is not included among the written client representations?Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? "Sufficient evidence has been made available to the auditor to permit the expression of an unmodified opinion."
What are the circumstances when written representation can be obtained in auditing?Certain written representations are required by ISAs to be requested from management; in other cases, the auditor may seek written representations to confirm oral representations made by management during the course of the audit or in response to particular enquiries or in support of other audit evidence obtained by ...
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Which of the following matters would materiality limits not apply when obtaining written client representations?
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