Exam 24: Completing the Audit

The fieldwork for the December 31, 2013 audit of Schmidt Corporation ended on March 17, 2014.The financial statements and auditor's report were issued on March 29, 2014.In each of the material situations (1 through 5)below, indicate the appropriate action (a, b, c ).The possible actions are as follows: a.Adjust the December 31, 2013 financial statements. b.Disclose the information in a footnote in the December 31, 2013 financial statements. c.No action is required. The situations are as follows: ________ 1.On March 1, 2014, one of Schmidt Corporation's major customers declared bankruptcy.The customer's financial condition in 2013 was deteriorating and they owed Schmidt Corporation a large sum of money as of the balance sheet date. ________ 2.On February 17, 2014, Schmidt Corporation sold some machinery for its book value. ________ 3.On February 20, 2014, a flood destroyed the entire uninsured inventory in one of Schmidt's warehouses. ________ 4.On January 5, 2014, there was a significant decline in the market value of the securities held for resale from their value as of the balance sheet date. ________ 5.On March 10, 2014, the company settled a lawsuit at an amount significantly higher than the amount recorded as a liability on the books as of the balance sheet date.

Although the letter of representation is typed on the client's letterhead and signed by the client, it is common for the auditor to prepare the letter.

While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients.The primary purpose of this letter is to provide:

An auditor performs interim work at various times throughout the year.The auditor's subsequent events work should be extended to the date of:

Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses.

In connection with the annual audit, which of the following is not a "subsequent events" procedure?

Current professional auditing standards make it clear that management, not the auditor, is responsible for identifying and deciding the appropriate accounting treatment for contingent liabilities.

State three items that should be included in a standard "inquiry of attorney" letter.

What two steps must an auditor do if they have reservations about the audit client continuing as a going concern?

Which of the following is a contingent liability with which an auditor is particularly concerned?

Auditors will generally send a standard inquiry letter to:

If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: accumulate additional evidence or issue either a qualified or an adverse opinion.

What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities?

List the three reasons why an experienced member of the audit firm must thoroughly review audit documentation at the completion of the audit.

The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner.

Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent:

To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except:

The standard letter of inquiry to the client's legal counsel should be prepared on:

An independent review must be performed of all audits.

Besides the search for contingent liabilities and the review for subsequent events, the auditor has four important final evidence accumulation responsibilities, all of which are required by current professional auditing standards.Discuss each of these four responsibilities.