LO# 1

Review for Contingent Liabilities

A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur.
Examples Pending or threatened litigation;
Actual or possible claims and assessments; Income tax disputes; Product warranties or defects; Guarantees of obligations to others; Agreements to repurchase receivables that have been sold. 17-1

Probable: The future event is likely to occur. Reasonably Possible: The chances of the future event occurring is more than remote but less than probable. Remote: The chance of the future event occurring is slight.

LO# 2

Audit Procedures for Identifying Contingent Liabilities

Read minutes of meetings of the board of directors, committees of the board, and stockholders. Review contracts, loan agreements, leases, and correspondence from government agencies.

Review income tax liability, tax returns, and IRS agents reports.

Confirm or otherwise document guarantees and letters of credit.

Inspect other documents for possible guarantees.

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LO# 2

Audit Procedures for Identifying Contingent Liabilities

Specific Audit Procedures Conducted Near Completion of Audit
Inquiry and discussion with management about its policies and procedures for identifying, evaluating, and accounting for contingent liabilities. Examine documents in the entitys records such as correspondence and invoices from attorneys for pending or threatened lawsuits.

Obtain a legal letter that describes and evaluates any litigation, claims, or assessments.

Obtain written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed in accordance with FASB No. 5.
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LO# 3

Legal Letters
A letter of audit inquiry (a legal letter) sent to the clients attorneys is the primary means of obtaining or corroborating information about litigation, claims, and assessments.

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LO# 4

Commitments
Long-term contracts to purchase raw materials or sell their products at a fixed price.

To obtain a favorable pricing arrangement.

To secure the availability of raw materials.

Long-term commitments are usually identified through inquiry of client personnel during the audit of the revenue and purchasing processes. In most cases, such commitments are disclosed in a footnote to the 17-5 financial statements.

LO# 5

Review for Subsequent Events for Audit of Financial Statements

Balance Sheet Date

Type I Event Affects estimates that are part of financial statements.

Require adjustment of the financial statements.

Type II Event Conditions did not exist at the balance sheet date.
Require disclosure and possibly pro forma financial statements.
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LO# 5

Review of Subsequent Events for Audit of Financial Statements

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LO# 6

Dual Dating
When a subsequent event is recorded or disclosed in the financial statements after the date on which the auditor has obtained sufficient appropriate audit evidence but before the issuance of the financial statements, the auditor must consider the following options for dating of the auditors report: (1) Dual date the report (limits liability) (2) Use the date of the subsequent event.

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LO# 7

Audit Procedures for Subsequent Events

Inquire of Examples of audit Management procedures Read Interim Financial Statements Examine the Read Minutes Books of of Meetings Original Entry Obtain Management Inquire of Representatio Legal Counsel n Letter
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LO# 7

Review of Subsequent Events for Audit of Internal Control over Financial Reporting
Auditors of public companies are responsible to report on any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditors report.

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Final Evidential Evaluation Processes

Perform final analytical procedures. Evaluate entitys ability to continue as a going concern.

LO# 8

Obtain a representation letter.

Review working papers.

Final assessment of audit results.

Evaluation of financial statement presentation and disclosure. Obtain an independent review of the engagement.

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LO# 8

Estimating Likely Misstatements

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LO# 8

Archiving and Retention

Sarbanes-Oxley Act and PCAOBs Documentation Standard

Requires audit firms to archive their public-company audit files for

retention within 45 days following the time the auditor grants permission to use the auditors report in connection with the issuance of the companys financial statements.

Retain audit documentation for 7 years from the date of completion of the
engagement, as indicated by the date of the auditors report, unless a longer period of time is required by law.

Retain all documents that form the basis of the audit or review. Include in the audit file for significant matters any document created,
sent, or received, including documents that are inconsistent with a final conclusion. Significant changes in audit plans or conclusions must also be documented.

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LO# 9

Going Concern Considerations

Normal Audit Procedures That May Identify Conditions and Events Indicating Going Concern Problems: Analytical procedures Review of subsequent events Tests for compliance with debt agreements Reading of board of directors and other committee minutes Inquiry of legal counsel Confirmation with parties on arrangements to provide or maintain financial support

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LO# 9

Going Concern Considerations

Financial Conditions and Ratios That Indicate Financial Distress Financial Conditions: Recurring operating losses Current-year deficit Accumulated deficits Negative net worth Negative working capital Negative cash flow Negative income from operations Inability to meet interest payments Ratios: Net worth/total liabilities Working capital from operations/total liabilities Current assets/current liabilities Total long-term liabilities/total assets Total liabilities/total assets Net income before taxes/net sales
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LO# 9

Going Concern Considerations

Other Financial Difficulties: Default on loans Dividends in arrears Restructuring of debt Denial of trade credit by suppliers No additional sources of financing Internal Matters: Work stoppages Uneconomic long-term commitments Dependence on the success of one particular project External Matters: Legal proceedings Loss of a major customer or supplier Loss of a key franchise, license, or patent

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Communications with Audit Committee and Management

LO# 10

Auditors are required to communicate to those charged with governance certain matters related to the conduct of the audit.
Auditors responsibility under GAAS. Significant audit adjustments. Consultation with other accountants. Significant accounting policies. Auditors judgments about the quality of the entitys accounting principles. Major issues discussed with management before the auditor was retained. Management judgments and accounting estimates. Disagreements with management. Difficulties encountered during the audit.

Fraud involving senior management and fraud that causes material misstatement of the financial statements.

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LO# 11

Subsequent Discovery of Facts Existing at the Date of the Auditors Report

Notify the client that the auditors report must no longer be associated with the financial statements. Notify any regulatory agency having jurisdiction over the client that the auditors report can no longer be relied upon. Notify each person known to the auditor to be relying on the financial statements.
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