ACCT 4344

Fall 2016
Bryan Blake Crusius
Exam 4 Review
1. Chapter 17
a. Contingencies Definition, information sources
i. Contingent liability- an existing condition or set of circumstances
involving uncertainty as to possible loss that will ultimately be
resolved when some future event occurs or fails to occur.
1. Examples include: pending or threatened litigation, actual
or possible claims and assessments, income tax disputes,
product warranties or defects, guarantees of obligations
to others, and agreements to repurchase receivables that
have been sold.
ii. Audit Procedures for Identifying Contingent Liabilities
1. Reading the minutes of meetings of the board of directors,
committees of the board, and stockholders.
2. Reviewing contracts, loan agreements, leases, and
correspondence from government agencies.
3. Reviewing tax returns, IRS reports, and schedules
supporting the entitys income tax liability.
4. Confirming or otherwise documenting guarantees and
letters of credit obtained from financial institutions or
other lending agencies.
5. Inspecting other documents for possible guarantees or
other similar arrangements.
iii. Specific audit procedures conducted near the completion of the
audit (information sources)
1. Inquire and discuss with management about its policies
and procedures for identifying, evaluating, and accounting
for contingent liabilities.
2. Examine documents in the entitys records such as
correspondence and invoices from attorneys for pending
or threatened lawsuits.
3. Obtain a legal letter that describes and evaluates any
litigation, claims, or assessments.
4. Obtain written representation from management that all
litigation, asserted and unasserted claims, and
assessments have been disclosed in accordance with
FASB ASC Topic 450.
b. Legal Letters - Process, purpose, auditors response when lawyers
refuse to respond
i. Definition
1. Legal Letter- a letter of audit inquiry sent to the entitys
attorneys is the primary means of obtaining or
corroborating information about litigation, claims, and
assessments.
ii. The Process:
 1. The letter of inquiry is sent to the entitys attorneys to
corroborate information about litigation, claims, and
assessments.
2. Auditors typically analyze legal expense for the entire
period and then ask management to send a letter to in-
house attorneys (often referred to as general counsel) and
to external attorneys who have been consulted by
management.
a. Auditors should be particularly vigilant with
responses from the entitys general counsel and
from attorneys specializing in patent law or
securities laws.
iii. Purpose
1. To corroborate information about litigation, claims, and
assessments related to the company. This is potentially
important information that investors must be aware of.
iv. Auditors response when lawyers refuse to respond
1. A legal letter will generally contain a request for attorneys
to communicate with the auditor regarding potential
contingencies.
2. Attorneys may be unable to respond to the outcome of a
matter because the factors in the case do not allow them
to reasonably estimate the likelihood of the outcome or
estimate the possible loss.
a. However, refusal by an entitys attorney to furnish
information in a legal letter is a limitation on the
scope of the audit that is potentially
sufficient to preclude an unqualified opinion.
c. Management Representation Letters primary purpose, date of the
letter, general contents of the letter, what auditors should do if the
client does not sign the letter, what are the two possible opinion types
(and which of the two is most common)
i.
d. Subsequent events
i. What are subsequent events and when do they occur?
1. Subsequent events- events or transactions that occur
after the balance sheet date but before the issuance of
the financial statements materially affect the financial
statements.
ii. What are the typical audit procedures used to identify
subsequent events?
1.
iii. What are types of subsequent events (Type I and II)?
1. Type I (Recognized Events): events that provide additional
evidence about conditions that existed at the date of the
balance sheet and the affect the amounts or estimates
involved in the financial statement preparation process.
 a. Type I events require adjustment to the
numbers in the financial statements.
b. Examples of Type I events or conditions (in both
examples, additional evidence that sheds light on
estimates previously made in the financial
statements became available after the balance
sheet date but before the financial statements were
issued):
i. An uncollectible account receivable resulting
from deterioration in a customers financial
condition prior to year-end, about which the
holder of the receivable is unaware. The
customer declares bankruptcy after the
balance sheet date but prior to the issuance
of financial statements.
ii. The settlement of a lawsuit after the balance
sheet date but prior to issuance of the
financial statements for an amount different
from the amount recorded in year-end
financial statements as a contingent liability.
2. Type II (Unrecognized Events): events that provide
evidence about conditions that did not exist at the date of
the balance sheet but that arose subsequent to that date.
a. Type II events usually require disclosure in
the notes to the financial statements.
b. In some instances, where the effect of the
Type II event or transaction is very
significant, pro forma financial statements
may be required in order to prevent financial
statements from being misleading.
c. Examples of Type II events that result in disclosure
include:
i. Loss of the entitys manufacturing facility or
assets resulting from a casualty such as a
fire or flood that occurred after the balance
sheet date but prior to the issuance of the
financial statements.
ii. Purchase or disposal of a business by the
entity after the balance sheet date but prior
to issuance of the financial statements.
iii. A capital stock or bond issuance by the
entity after the balance sheet date but prior
to the issuance of financial statements.
iv. Losses on receivables caused by conditions
such as a business failure arising subsequent
to the balance sheet date.
 iv. How should auditors respond to a subsequent event depending
on the circumstances (e.g., when the event was discovered,
whether the event affects audited balances, etc.)?
1.
e. Adjusting journal entries required procedures to determine whether
identified misstatements (i.e., the items on the summary of audit
differences) should be booked
i.
f. Purposes of audit documentation review (at the various levels of
review)
i.
g. Subsequent discovery of facts what are they and how should auditors
respond
i.
h. Discovery of omitted audit procedures how should auditors respond if
it is determined that certain audit procedures have not been performed
i.

2. Chapter 18
a. Audit reports:
i. know the general purpose of the audit report,
ii. the general language used in the standard audit report (e.g.,
know which paragraph of the report includes important phrases),
iii. the types of audit reports for the financial statement audit (e.g.,
unqualified, qualified, adverse, etc.),
iv. the situations in which each type might be issued,
v. and the required changes to the standard audit report when
each opinion type is issued (including the addition and location
of an explanatory paragraph, if needed)
b. Under what circumstances might an auditor issue an unqualified report
with explanatory language? Where does the explanatory paragraph
go?
c. What are the required modifications to the standard audit report when
GAAP is not applied consistently from year to year?
 d. Going concern issues what are the procedures auditors perform to
make the evaluation, what are the indicators, what is the typical
opinion type, how is the standard report modified?
e. What must auditors do when there is a division of responsibility? What
reporting options are available and how is the report modified under
each scenario?
f. What should auditors do if they discover they are not independent?
g. Auditors responsibilities regarding information accompanying the F/S

3. Chapter 21
a. Attestation services
i. Know about the attestation services we discussed in class
ii. Reports on internal control over financial reporting (necessary
conditions, basic contents of the auditors report);
iii. Reports on financial forecasts and projections (definitions,
differences in report distribution options)
b. Audits, Reviews, and Compilations:
i. Know the differences in the level of assurance provided by each
(and understand what this means),
ii. the types of procedures performed for each,
iii. the differences in the wording of the reports issued for each type
of service
c. Internal Audit Understand the key characteristics of internal audit,
describe the primary mechanism that helps internal auditors be
independent
4. Case Studies & Financial Shenanigans
a. Be prepared to assess risk for an entity and identify aspects of a
companys operations and financial situation that would increase or
decrease risk, as well as how an auditor should respond to those risks.