Auditing Final Exam with complete solutions

The auditor's responsibilities related to the audit opinion are - -The auditor has an obligation to ensure that users of the financial statements are informed about the misstatement and that the audit opinion should no longer be relied upon. -Ensure the client informs the SEC and other regulatory agencies of the​ misstatement, and issues revised financial statements with an explanation of the reason for the revision. -If the client refuses to disclose the​ misstatement, the auditor should inform the board of directors. When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of the issuance? - The auditor should take no action regarding the event. Required items to be communicated by the auditor to the audit committee or others charges with governance? - -significant findings arising from the audit -information about the overall scope and timing of the audit -information about the auditor's responsibility in an audit of financial statements Written management responsibilities obtained by the auditor in connection with a financial statement audit should include a - statement of management's belief that the effects of uncorrected misstatements are not material. A management letter - contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business What procedures do auditors typically follow to address the completeness of​ disclosures? - The auditor is concerned with whether management has disclosed all required information for both transactions and account balances. Auditors often use a disclosure checklist to determine that all required disclosures are completely presented and disclosed in the financial statements and accompanying footnotes. This helps the auditor obtain sufficient appropriate evidence about the presentation​ transaction-related objective and the presentation​ balance-related objective. First Type of Subsequent Event - The first type of subsequent event is one that has a direct effect on the financial statements and requires adjustment. Ex. Disposal of equipment not being used in operations at a price below the current book value & sale of raw materials as scrap in the period subsequent to the balance sheet date. Second Type of Subsequent Event - The second type of subsequent event is one that has no direct effect on the financial statements but for which disclosure is advisable. Ex. issuance of bonds or equity securities & uninsured loss of inventories as result of fire. Why analysis of legal expense if an essential part of every audit - The analysis may give an indication of contingent liabilities which may become actual liabilities in the future and require disclosure in the current financial statements. Since any single contingency could be​ material, it is important to verify all legal​ transactions, even if the amounts are small. The subsequent information should be incorporated directly into the statements if the conditions causing the change in valuation - -took place before the balance sheet date -occurred both before and after the balance sheet date -are reimbursable through insurance policies When are analytical procedures required on an​ audit? What is the primary purpose of analytical procedures during each phase of the​ audit? - -Analytical procedures are required during the completion​ phase, as a final review for material misstatements or financial problems. -Analytical procedures are required during the planning phase to assist the auditor in determining the​ nature, extent, and timing of work to be performed. Most important reasons for performing analytical procedures? - - Indication of the presence of possible misstatements in the financial statements -reduction of detailed audit tests -assessment of the entity's ability to continue as a going concern -understanding the client's business and industry Why is it important that an auditor develop an expectation of the account balance when performing substantive analytical procedures about the reasonableness of an account​ balance?​ - -The assurance provided by an analytical procedure performed as part of substantive testing depends on the precision of the relationship of the account balance to other accounts or​ non-financial information. -The assurance provided by an analytical procedure performed as part of substantive testing depends on the precision of the​ auditor's expectation of the account balance and the reliability of the data used to develop the expectation. -Without a precise expectation of what the account balance should be in relation to other​ accounts, non-financial​ data, or historical​ trends, the auditor is unable to recognize whether the result of the analytical procedure suggests that a potential misstatement in the account balance exists. What are the audit documentation requirements when performing a substantive analytical​ procedure? - Auditing standards require the auditor to document in the working papers the​ auditor's expectation and factors considered in its development. three broad objectives management has when designing effective internal control. - -efficiency and effectiveness -reliability of financial reporting -compliance with laws and regulation Efficiency and effectiveness of operations - Controls within a company encourage efficient and effective use of its resources to optimize the​ company's goals. An important objective of these controls is accurate financial and nonfinancial information about the​ company's operations for decision making. Reliability of financial reporting - Management is responsible for preparing statements for​ investors, creditors, and other users. Management has both a legal and professional responsibility to be sure that the information is fairly presented in accordance with reporting requirements of accounting frameworks such as GAAP and IFRS. The objective of effective internal control over financial reporting is to fulfill these financial reporting responsibilities. Compliance with Laws and Regulations - Section 404 requires management of all public companies to issue a report about the operating effectiveness of internal control over financial reporting. In addition to the legal provisions of Section​ 404, public,​ nonpublic, and​ not-for-profit organizations are required to follow many laws and regulations. Some relate to accounting only​ indirectly, such as environmental protection and civil rights laws. Others are closely related to​ accounting, such as income tax regulations and​ anti-fraud regulations such as the Foreign Corrupt Practices Act of 1977 and certain provisions of the​ Sarbanes-Oxley Act. Types of Control Activities with Examples - -Physical control over assets and records−A password is required before an entry can be made into the computerized accounts receivable master file. -Proper authorization of transactions and activities−The granting of credit is authorized before shipment takes place. -Independent checks on performance−Bill clerk verifies prices and quantities on an sales invoices before they are sent to customers.