Management and Organizational Studies 3363A/B Chapter 19: MOS 3363 - Chapter 19

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Management and Organizational Studies
Management and Organizational Studies 3363A/B
Michelle Loveland

Completing the Audit • The goal is to assess whether adequate evidence was collected during the cycle tests • Determine whether additional evidence is required • Financial Statement Disclosure Checklist o Remind the auditor of discovered problems o Facilitates a quality control review process Contingent Liabilities • A contingent liability is a: o Potential future obligation o For an unknown amount o Resulting from activities that have already taken place • The auditor needs to gather information about: o The nature of the contingent liability o Amount involved o Likelihood of outcome • If the auditor concludes that there are contingent liabilities, they must evaluate the significance of the potential liability and the nature of the disclosure that is necessary How to Search for Contingent Liabilities: • Inquire to management • Read the minutes of the board of directors • Review contracts • Review income tax liability, tax returns and other tax-related material • Examine documents, such as correspondence with lawyers • Obtain a legal letter • Obtain a representation letter from the client Commitments • A commitment is an agreement that the entity will hold a fixed set of conditions • Usually disclosed in the notes of the financial statements • The search for unknown commitments is usually preformed as part of the audit for each area o When verifying sales transactions, the auditor should be aware of sales commitments • The auditor needs to gather information about: o The nature of the contingent liability o Amount involved o Likelihood of outcome Legal Conformation • Major tool used by the auditor to evaluate claims against the entity • Used to obtain information about two categories of lawsuits: o Outstanding claims: Client has been notified about the claim o Possible (uncertain) claims: Client is aware of the situation that could lead to the claim, but no claim has been filed • A standard letter of conformation should contain the following: o A list of outstanding and possible claims o A description of the nature and status of each current and possible claim o Indication of management’s evaluation of the amount and likelihood of gain/loss o Request that the lawyer reply to the client Legal Conformation • The lawyer is not required to respond to the auditor o Instead the speak with management, and o Inform management of the responsibility to inform the auditor • Unless management discloses these claims, the auditor has no way of discovering whether claims exist Analyzing Legal Expenses • Gives indication of unreported contingent liabilities • Identify law firms where conformations may be required • Identify events that may need to be confirmed with the law firm Subsequent Events • The auditor must conduct a review for subsequent events o Transactions and events occurring after the balance sheet date • The auditor examines subsequent events up to the audit report date • There are two types of subsequent events: o Direct Effect on the Financial Statements (Requires adjustment) ▪ Declaration of bankruptcy of a customer with large outstanding accounts • With a previously known deteriorating financial condition ▪ Settlement of a lawsuit for an amount different than recorded o Indirect Effect on the Financial Statements (Requires note disclosure) ▪ Unexpected declaration of bankruptcy of a customer with large outstanding accounts • No previous knowledge ▪ Loss of assets due to a flood or fire • The auditor must perform procedures to determine: o Appropriate
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