Completeness Reviewing the use of and accounting for prenumbered shipping documents and invoi ces supports management's

financial statement assertion of completeness. The num bering helps assure that transactions do not get lost and thus that all transact ions are properly included. The standard control for completeness is controlling prenumbered forms. A questi on, therefore, which would appear in an internal control questionnaire addressin g completeness is "Are purchase orders, receiving reports, and vouchers prenumbe red and periodically accounted for?" The completeness assertion for long-term investments addresses the proper inclus ion of all long-term investments. An internal control satisfying the completenes s assertion would compare the securities on hand with those recorded to ensure t hat all recorded securities held were actually held. The cardinal rule regarding cash receipts is to ensure that they are recorded. B y requiring employees to record all sales in the cash register and to give custo mers the cash register tape evidencing the sale, companies can ensure that all c ash sales are recorded (the completeness of cash receipts for cash sales.) The a uditor can test controls by observing employees' use of cash registers and tapes . Valuation or Allocation Testing credit approval before shipping to customers tests the valuation asserti on (not the existence or occurrence assertion). This test addresses the collecti bility of accounts receivable. Existence or Occurence The independent comparison of perpetual inventory records with goods on hand add resses the existence of manufacturing transactions which produce inventory. Vouching of securities' purchases to brokers' advices and canceled checks addres ses existence rather than completeness Tests from the accounting record (the voucher register) to the detail are tests of existence/occurrence. Confirmations of accounts receivable provide strong evidence for the existence a ssertion and some evidence for the valuation (accuracy) assertion. They rarely p rovide evidence about the completeness assertion because customers are typically happy to confirm an amount that is less than the amount they actually owe. They are, therefore, not terribly inclined to report understatement errors on their accounts. SAS No. 67, "The Confirmation Process" (AU 330.12), states, "Accounts receivable confirmations are likely to be more effective for the existence assertion than for the completeness and valuation assertions." Rights and Obligations Rights and obligations refers to the entity's right to an asset or obligation fo r a liability. Verifying credit approval on a sample of sales transactions would provide evidence in support of the valuation of accounts receivable (credit gra nting policies would reduce the number of potential bad debts and thus aid in pr operly valuing accounts receivable). It does not verify any controls related to rights and obligations. Follow-up on errors reported by customers provides evidence that the customers e xist and that the receivables are valid; i.e., that the client has the rights to the assets. The auditor's test of controls thus provides evidence to support th e assertion of rights and obligations. It does not address presentation and disc losure. While the accounting records - including the general and subsidiary ledgers, the journals, and supporting worksheets - are considered to constitute evidence in support of the financial statements, accounting data, by itself, cannot be consi dered sufficient support for the financial statements. The auditor must test the

accounting data in order to develop persuasive evidence to support the opinion. Reducing Attestation Risk Evidence that can be examined is considered more reliable than oral evidence and analytical procedures. Direct examination of evidence involves examining intern al or external records, documents, or assets audit evidence Audit evidence differs from legal evidence, which is bound by rigid rules. The v alidity of audit evidence is a matter of the auditor's judgment. Note that this is another negatively worded question. They want the presumption that does NOT relate to the appropriateness of audit evidence. The appropriatene ss of evidence addresses the reliability of that evidence. The fact that an audi t must be performed within a reasonable time period and at reasonable cost is no t relevant to the appropriateness of evidence. It does, however, relate to the s ufficiency of evidence Greater reliability (and thus, persuasiveness) is achieved from evidence obtaine d from sources outside the entity, even when that evidence is obtained from the client. A review of the audit documentation is a critical part of the overall audit proc ess. It is the means by which every audit judgment made is reviewed and confirme d by a more experienced auditor to ensure that the audit evidence supports the o pinion rendered Interim date - substantive tests The auditor must consider certain factors before applying principal substantive tests at an interim date. These factors include the difficulty of controlling th e incremental audit risk, the effectiveness of internal controls, the presence o f rapidly changing business conditions or circumstances, and the predictability of the balances being audited. The auditor would not bother to test accounts at interim unless they were consid ered material to the financial statements. The auditor's objective is to issue an opinion on the financial statements at th e balance sheet date. The performance of substantive tests prior to the balance sheet date increases the risk that misstatements may occur at the balance sheet date that the auditor will not detect. As a result, the auditor must consider ce rtain factors carefully before electing to perform such tests. The auditor must consider whether the amounts of the year-end balances selected for interim testi ng are reasonably predictable with respect to amount, significance, and composit ion. The auditor is required to evaluate certain factors. Those factors do not includ e the likelihood of assessing the risk of incorrect rejection too low. Note that the risk of incorrect rejection is the risk that the auditor will reject a bala nce as being fairly stated when it really is (or the risk that the auditor will reject a control as operating effectively when it really is). Auditors will norm ally focus on the risk of incorrect acceptance rather than the risk of incorrect rejection. The effectiveness of the internal control structure directly impacts the reliabi lity of the accounting data and financial statements. The more effective the int ernal control structure, the greater the assurance provided as to the reliabilit y of evidential matter The reliability of evidential matter refers to its appropriateness (validity and relevance). It does not refer to the amount of evidence obtained. The requireme nt related to amount is a judgment call. The auditor must obtain sufficient, app ropriate evidence to support the opinion test of controls.

The auditor is verifying that segregation of duties exists and is operating effe ctively. Tests of controls are intended to enable the auditor to ascertain whether the co ntrols are designed and/or operating effectively. Required Documentation - GAAS GAAS require that a written audit program be prepared that details the audit pro cedures considered necessary to achieve the objectives of the audit. - written engagement letter formalizing the level of service to be rendered - written audit program describing the necessary procedures to be performed - memorandum setting forth the audit team's discussion regarding the risk of ma terial misstatement due to fraud - client engagement letter that summarizes the timing and details fo the audito r's planned field work - indication in the audit documentation that the accounting records agree or re concile with the financial statements - basis for the auditor's conclusions when the assessed level of control risk i s at the maximum level for all financial statement assertions Not required by GAAs A flowchart depicting the segregation of duties and authorization of transaction s is one of several methods that may be employed to document the auditor's under standing of the internal control system. Its use, however, is not required. While flowcharts and internal control questionnaires both provide an accepted me ans of documenting the auditor's understanding of the internal control structure , neither is required. Furthermore, neither is used to evaluate the effectivenes s of internal control; they are used to document an understanding of internal co ntrol Auditor's Documenation Audit documentation serves mainly to provide the principal support for the opini on rendered in the auditor's report. They also aid the auditor in the conduct an d supervision of the audit. The audit documentation must show that the accounting records have been agreed t o or reconciled with the financial statements. The audit documentation provides the primary support for the OPINION RENDERED on the financial statements being audited, not the financial statements themselves As the assessed level of control risk increases (decreases), the acceptable leve l of detection risk decreases (increases) and the nature, timing, and extent of the audit work performed and the related documentation is altered The auditing procedures documented, and the audit documentation itself, should b e both efficient and effective. This means that it would be appropriate to use c alculator tapes with names or explanations on the tapes, rather than writing sep arate lists into the documentation, as long as the nature of the work performed and the conclusions reached were clearly evident. Rewriting the lists would take additional time without necessarily offering more persuasive evidence. The quantity and content of an auditor's documentation would least likely be aff ected by the content of the representation letter. The representation letter is prepared at the end of the audit to document management's responses to audit inq uiries as well as key management assertions. Quanity and content affected by (1) condition of the clients records; (2) asses sed level of control risk; (3) nature of the auditor's report 1. Nature of engagement 2. Financial statements under examination 3. Type of audit report 4. Nature and condition of client's records 5. Assessment of control risk 6. Experience and skills of audit team The work performed by the staff is recorded in the audit documentation. The supe rvisor would review the audit documentation to ensure that the evidence collecte

d adequately supports the audit judgments reached and ensures that GAAS were pro perly followed Auditor's Documentation - Current File The current file of an auditor's documentation includes items relevant to the cu rrent year audit. The bank reconciliation that reflects the support for the cash balance in the current year financial statements would be included in the curre nt file. The working trial balance would NOT appear in the permanent file. It is normally included in the current year audit documentation. Auditor's Documentation - Permanaent File The articles of incorporation would be important to future audits, as well as to the current audit. They would be included in the permanent file, rather than th e current file. A permanent file contains information that is referred to for more than one audi t period. Therefore, an auditor's permanent files most likely would include anal yses of capital stock and other owners' equity accounts. also include - (1) bond indenture agreements (2) lease agreements (3) flowchart of internal control structure The permanent file contains information which is required for multiple periods. Items commonly included in the permanent file include debt agreements, articles of incorporation, the corporate charter, etc. Use of Microcomputers The use of microcomputers impacts the manner in which audit documentation is com pleted and displayed. If a spreadsheet program is used to create the documentati on, it may not contain readily observable details of calculations because the fo rmulas will be hidden in the cells. audit documentation retention requirements under the AICPA and PCAOB guidelines, respectively Under AICPA standards (applicable to audits of "non-issuers") - The audit docume ntation should be retained for at least 5 years from the report release date. Under PCAOB standards (applicable to audits of "issuers") - The audit documentat ion should be retained for at least 7 years from the report release date. "Documentation Completion Date" under the AICPA and PCAOB requirements, respecti vely Under AICPA standards (applicable to audits of "non-issuers") - The auditor shou ld complete the assembly of the final audit file no later than 60 days after the "report release date." Under PCAOB standards (applicable to audits of "issuers") - The auditor should c omplete the assembly of the final audit file no later than 45 days after the "re port release date." Negative Confirmation When negative confirmations are used, the respondent is asked to return the requ est only if there is a problem or error in the balance. Thus, it is assumed that the balances are correct unless the confirmation is returned. Unreturned negati ve confirmation requests, therefore, are considered to be evidence. This evidenc e is implied, it is not explicit. In order to use the negative form of accounts receivable confirmation, the follo wing conditions must be met: 1) the combined assessed level of inherent and control risk is low; 2) a large number of small balances is involved; and 3) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. (AU 330.20) -->Having a small number of accounts in dispute and an accounts receivable bala nce arising from sales to many customers with small balances meets two of the th

ree criteria and would be more likely to justify the use of negative confirmatio ns. Confirmation responses - fax To ensure that a fax is valid, the auditor would need to perform other procedure s that would aid in verifying the authenticity of the fax. Telephoning the sende r would provide additional evidence that the fax was authentic. Although the shipping documents might provide evidence that the sales underlying the accounts receivable actually occurred, they do not provide any evidence to support the authenticity of the fax. Confirmations - Blank Form Using the blank form of confirmation of accounts receivable provides greater ass urance that the recipient of the confirmation has verified that the information is correct. It is more likely to be used when the auditor is concerned that reci pients will not devote proper attention to the confirmations. AICPA Professional Standards (AU 330, paragraph 19) points out that "...the use of blank confirmation requests may provide a greater degree of assurance about t he information confirmed. However, blank forms might result in lower response ra tes because additional effort may be required of the recipients; consequently, t he auditor may have to perform more alternative procedures." Anything that incre ases the effort that the respondents must make may cause a lower response rate a nd require more alternative procedures to be performed. Accounting Estimates AICPA Professional Standards (AU 342, paragraph 04) state, "The auditor is respo nsible for evaluating the reasonableness of accounting estimates made by managem ent in the context of the financial statements taken as a whole." In evaluating management's accounting estimates for reasonableness, the auditor must first obtain an understanding of how management developed the estimate. Whi le this approach is cited in the Standards, common sense should also tell you th at you must first understand how the estimate was created. Once you understand h ow the estimate was developed, you can then review and test the process (includi ng evaluating the key factors or assumptions), develop an independent estimate, and review subsequent events. -->This question focuses on something that would be a "concern" to the auditor a bout an accounting estimate. To the extent that the estimate is potentially bias ed (e.g., perhaps management has a lot of latitude in determining the resulting estimate), the auditor would be concerned about the reasonableness of that estim ate. The auditor must evaluate the reasonableness of the accounting estimates made by management. Because of their nature, such estimates are subject to bias, even w hen the estimation process involves the use of relevant and reliable data and co mpetent personnel. --> In evaluating the reasonableness of an accounting estimate, an auditor conce ntrates on key factors and assumptions that are: 1. significant to the accounting estimate; 2. sensitive to variations; 3. deviations from historical patterns; [Evaluating accounting estimates histori cally would enable the auditor to determine whether such estimates were properly valued]and 4. subjective and susceptible to misstatement and bias. If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most li kely to review the lawyer's letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates co uld be material to the financial statements. It is also an area that falls outside of the normal financial reporting process

and, thus, is more likely to be missed. Fair Value SAS No. 101 (AU 328.23) points out that, "...substantive tests of the fair value measurements may involve...developing independent fair value estimates for corr oborative purposes --> Developing independent estimates to compare to management's estimates Reviewing subsequent events and transactions to evaluate the reasonableness of the fair value measurements Performing tests of the valuation model, including significant assumptions, and the underlying data *Note: Tests of control are not "substantive" audit procedures *Note: In describing certain assets and liabilities, SAS No. 101 (AU 328.08) sta tes, "...the existence of published price quotations in an active market is the best evidence of fair value." Fair Value - no observable market prices The auditor is responsible for this. SAS No. 101 (Au 328.18) states, "When there are no observable market prices and the entity estimates fair value using a val uation method, the auditor should evaluate...whether: Management has sufficientl y evaluated and appropriately applied the criteria, if any, provided by GAAP to support the selected method." - Management has appropriately applied criteria provided by GAAP - Management's valuation method is appropriate relative to the industry and env ironment of the entity - Management's valuation method is appropriate in the circumstances. *Note: The decision to engage a specialist is an auditor judgment, not a managem ent decision --> The decision to engage a specialist is a matter of professional judgment. SA S No. 101 (AU 328.20) states, "The auditor may have the necessary skill and know ledge to plan and perform audit procedures related to fair values or may decide to use the work of a specialist." Fair Value - Auditor responsibility - The auditor must obtain sufficient appropriate audit evidence to provide reaso nable assurance that fair value measurements and disclosures comply with GAAP. T he auditor should also determine that the methods used to determine fair value a re consistently and appropriately applied. - The auditor is responsible for this. SAS No. 101 states (AU 328.09), "The audi tor should obtain an understanding of the entity's process for determining fair value measurements and disclosures and of the relevant controls sufficient to de velop an effective audit approach - The auditor is responsible for determining that the entity's fair value measur ements and methods used meet the requirements of GAAP and are consistently appli ed - The auditor is responsible for obtaining sufficient appropriate evidence to pr ovide reasonable assurance that fair value measurements and disclosures meet the requirements of GAAP ==> Communication with thorse with governance includes: SAS No. 101 states (AU 328.50) that, "... the auditor considers communicating th e nature of significant assumptions used in fair value measurements, the degree of subjectivity involved in the development of the assumptions, and the relative materiality of the items being measured at fair value to the financial statemen ts as a whole." Lawyer - Letter of inquiry A lawyer may appropriately limit the response to matters to which the lawyer has given substantive attention in the form of legal consultation or representation - The auditor would NOT confirm with the attorney that ALL claims have been reco rded in the financial statements. All claims do not require recording and the at

torney would not have knowledge of what had been recorded in the financial state ments. - The refusal of a client's attorney to provide information requested in an inqu iry letter is considered a limitation on the scope of the audit. It would result in a disclaimer or a qualified opinion. An attorney's letter is primarily intended to provide the auditor with corrobora tion of the information furnished by management about litigation, claims, and as sessments. The description and evaluation of litigation, claims, and assessments that existed at the balance sheet date are obtained from management and confirm ed with the attorney. The client's attorney is asked to provide a letter describing and evaluating lit igation pending and in process and asserted claims. Immaterial items may be excl uded, "provided that the lawyer and the auditor have reached an understanding on the limits of materiality for this purpose." - The understanding is to be reached by the auditor and the lawyer, not by the a udit committee and the lawyer Litigation, Claims, and assessment Management is the primary source of information about litigation, claims, and as sessments. The information provided by management is corroborated by the client' s lawyer. The auditor would discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. Note- The attorney would not necessarily be able to address all litigation, clai ms, and assessments. The attorney would have knowledge only of those cases that the attorney was handling. The auditor is required to obtain an attorney's letter, which then provides some of the primary evidence supporting litigation, claims, and assessments. Note th at the question indicates that the auditor is corroborating information. The aud itor first obtains the information from the client. That information is then cor roborated by the information obtained from the attorney. Contingent Liabilities Issues that are significant to the entity (for example, litigation issues that r esult in contingent liabilities) normally rise to the level of discussion by tho se charged with governance. The auditor routinely reads the minutes of these mee tings to identify issues that have financial reporting implications, including i ssues related to contingent liabilities. A taxing authority could impose an assessment on an entity related to tax matter s. The auditor might then identify the existence of such an assessment by review ing correspondence between the entity and the taxing authority Materiality limits - would apply to 1. noncompliance with contractual agreements; 2. unasserted cl aims and assessments; 3. losses from sales commitments - The reporting requirements applicable to related party issues implicitly invo lve materiality considerations in evaluating the fairness of the financial state ments Materiality limits would not apply when obtaining written client representations involving management irregularities. Because of their nature and related implic ation7s for the control environment, management irregularities are considered to be extremely serious and no materiality limits would apply Management representation letter A management representation letter is obtained by the auditor to reduce the poss ibility of a misunderstanding concerning management's responsibility for the fin ancial statements and to document the representations made by management during the course of the audit

Written management representations obtained by the auditor should include repres entations regarding the financial statements, completeness of information, and r ecognition, measurement, and disclosure issues. Management's compliance with con tractual agreements that may affect the financial statements is a disclosure rep resentation. 1. Financial statements; 2. Completeness of information; 3. Recognition, measurement, and disclosure; 4. Subsequent events; and 5. Other industry or company-specific circumstances. The management representation letter commonly includes a statement as to violati ons or possible violations of laws or regulations whose effects should be consid ered for disclosure in the financial statements or as a basis for recording a lo ss contingency. While the items included in the management representation letter are specific to each client, the letter would ordinarily include a statement advising the audit ors of the completeness and availability of minutes of stockholders directors' m eetings. This is a required item in the management representation letter. Management must acknowledge its responsibility for the design and implementation of programs an d controls to prevent and detect fraud. DATED - same as auditor's report --> The auditor is concerned with events occurring through the date of the repor t that might impact the financial statements. Therefore, the management represen tation letter should be dated with the date of the auditor's report. --> The management representation letter should address all periods covered by t he auditor's report. Key's management representation letter, therefore, should c over the two periods being audited up through the date of the report, i.e., from January 1, 2005, through May 1, 2007. This requirement exists even if managemen t was not present during all periods covered by the auditor's report If manaement does not sign letter ==> This would be considered a scope limitatio n; probably resulting in disclaimer or withdrawal. Clietn Representation letter The client representation letter would ordinarily include statements about the d isclosure of compensating balances and other arrangements involving restrictions on cash balances Because of the possible effects of irregularities on other areas of the audit, m ateriality limits would not apply to the reporting of irregularities involving e mployees with significant roles in internal control in the written client repres entations. Related Parties audit's purpose evaluating the adequacy of disclosure about the related party tr ansactions. The auditor's primary responsibility pertaining to related parties is to ensure that disclosure of related party transactions in the audited financial statement s is adequate The auditor's primary concern with regard to related party transactions is discl osure. After identifying related party transactions, the auditor should examine the transactions in order to determine the purpose, nature, and extent of the tr ansactions and their effects on the financial statements. In that process, the a uditor would look to see if the transactions were properly authorized by the boa rd of directors. After determining that a related party transaction has occurred, the auditor sho uld obtain an understanding of the business purpose of the transaction. The audi tor should apply the procedures considered necessary to determine the purpose, n ature, and extent of the related party transactions and their effects on the fin ancial statements.

*NOTE: It is usually not possible for the auditor to ascertain whether the trans actions would have occurred had the relationship not been present. As a result, it is difficult to determine whether such transactions were consummated on terms equivalent to those prevailing in arms-length transactions. *Note: An auditor would not attempt to substantiate that the transaction was con summated on terms equivalent to an arm's-length transaction unless wording to th at effect were included in the financial statements. Such representations are di fficult to verify and they cannot appear in the financial statements without sub stantiation. Related Parties - Audit Procedures for existence 1. Inquire of management as to the existence of related entities; --> The auditor will need a list of related parties from management as a startin g point. More names may then be added by the auditor. The auditor will then use this list when investigating transactions, reading documents, or performing othe r auditing procedures to identify related party transactions 2. Review prior year's audit documentation; 3. Review any applicable SEC filings (for a public company); 4. Inquire of predecessor auditors if applicable; 5. Review stockholder listings of closely held companies to identify major stock holders Related Parties - Audit Procedures when transactions exist (1) Obtain an understanding of the business purpose of the related party transac tion; (2) Determine if the related party transaction was authorized by board of direct ors (those charged with governance); (3) Examine the reasonableness of the disclosures of the related party transacti ons. Related parties - Audit procedures to identify related party transaction (1) Review minutes of board of directors' meetings (those charged with governanc e) for activities with related parties; (2) Inquire of management as to such transactions; (3) Examine underlying documents for unusual or large transactions or transactio ns with terms or conditions that are inconsistent with prevailing market conditi ons. -->Reviewing confirmation of loans receivable and payable for indications of gua rantees is one of the auditing procedures that will assist the auditor in identi fying related party transactions. Subsequent Events - Type 1 - requiring adjustments to financial statements Material events or circumstances that clarify (that is, provide better informati on about) circumstances already in effect as of the balance sheet date. -->The period after the balance sheet date up to the issuance of the financial s tatements along with the audit report. Subsequent Events - Type 2 - requireing disclosure but not adjustment Note: includes Events that did not exist at year end but arose after year end re quire disclosure, not adjustment Material events or circumstances arising after the balance sheet date. --> The occurrence of a natural disaster ten days after the balance sheet date w hich results in a material loss is an example of a Type II subsequent event. A T ype II event pertains to conditions that arose subsequent to the balance sheet d ate and therefore do not require adjustment of the financial statements. Such ev ents must, however, be disclosed if they are of such a nature that disclosure is necessary in order to keep the financial statements from being misleading. No r

eport modification is necessary. Subsequent Events Events or transactions that occur after the balance sheet date and before the re lease of the auditor's report which have a material effect on the financial stat ements and, therefore, require either financial statement adjustment or disclosu re. --> Auditor report date : AU 530.01 states that, "The auditor's report should no t be dated earlier than the date on which the auditor has obtained sufficient ap propriate audit evidence to support the opinion." In discussing events occurring after completion of field work but before issuance of the auditor's report, AU 530.03 states, "When the adjustment is made without disclosure of the event, the report ordinarily should be dated in accordance with paragraph.01." Accordingly , the auditor's report would still be dated when sufficient appropriate audit ev idence had been obtained, that is, March 6, 2010. --> The auditor's responsibility for the audited financial statements ends with the issuance of the report, unless information that existed at the report date a nd may affect the report comes to the auditor's attention. In that case, the aud itor must determine whether the information would have affected the report and w hether there are parties currently relying on the financial statements. Audit Procedures to identify subsequent events 1. Inquiry of management; --> The auditor should inquire with management as to whether there was any signi ficant change in capital stock, long-term debt, or working capital after year en d. 2. Review minutes of board meetings (or those charged with governance); 3. Review of lawyers' letters; --> In reviewing subsequent events, the auditor would read the latest interim fi nancial statements and board of directors' minutes, inquire with legal counsel c oncerning litigation, claims, and assessments, and make specific inquiries of ma nagement. 4. Scan of accounting records subsequent to year end. Going concern indicators - Negative trends (recurring losses, negative cash flows from operating activit ies, etc.); - Internal matters (labor problems, dependence on a single project or customer) ; - External matters (litigation, general decline in the economy or industry, etc .); - Other indicators (defaults on debt, violations of debt covenants, etc.). --> Critical element Evidence related to the marketability of assets that management plans to sell wo uld mitigate an auditor's concerns about an entity's ability to continue as a go ing concern because the sale of assets would raise cash, a critical element of a going concern. (AU 341) Examples of conditions and events that may cause an auditor to have doubts about the entity's ability to continue as a going concern include recurring capital l osses, working capital deficiencies, negative cash flows from operating activiti es, and adverse key financial ratios. (AU 341) Going Concern - Audit Procedures a. Analytical procedures; b. Review for subsequent events; c. Review loan agreements for compliance with restrictive debt covenants; d. Read minutes of meetings of the board or those charged with governance; e. Inquire of management about legal liability issues and obtain lawyers' letter s. ==> GAAS indicate that it is not necessary to design procedures solely directed

toward an entity's going concern capabilities. Auditing procedures designed for other purposes may also be used to investigate potential going concern issues. S uggested procedures include the confirmation of financial support arrangements w ith third parties. (AU 341) Going Concern issues - audit reporting responsibilities a. Consider the adequacy of disclosure about these issues relative to GAAP (is t here a GAAP departure?); Note: "Except for..." is language used to identify a qualification for a departu re from the applicable accounting framework. Since the entity's financial statem ents adequately disclose the uncertainties surrounding the going concern issue, a qualification is not appropriate. The phrase "possible discontinuance of the e ntity's operations" is not consistent with language suggested in AICPA Professio nal Standards, which, instead, offer the phrase "substantial doubt about the ent ity's ability to continue as a going concern." b. If the financial statements (including disclosure) are consistent with the re quirements of GAAP, the auditor may choose to add an "explanatory paragraph" aft er the opinion paragraph while still expressing an unqualified opinion. --> If substantial doubt about an entity's ability to continue as a going concer n exists, the auditor must consider the adequacy of disclosure in the entity's f inancial statements and in the auditor's report. A going concern problem is addr essed through the addition of an explanatory paragraph to the auditor's report w ithout modification of the opinion. (AU 508) --> In a situation in which the auditor has substantial doubt about an entity's ability to continue as a going concern, the auditor is responsible for consideri ng the possible effects on the financial statements and the adequacy of related disclosure in the financial statements. Such disclosures might include condition s that give rise to the assessment of substantial doubt, as well as management's plans. The auditor should include an explanatory paragraph in the report (follo wing the opinion paragraph) stating the auditor's conclusion that "substantial d oubt about the entity's ability to continue as a going concern" exists. (AU 341) Going Concern "substantial doubt" - auditor responsibility - Inquire about management's strategy to overcome the entity's financial diffic ulties; - Evaluate the feasibility of the "key" elements of management's plans with emp hasis on "mitigating factors." ==> In evaluating a company's plans for dealing with adverse future conditions a nd events, an auditor would consider such mitigating factors as plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, and plans to increase ownership equity. The negotiation of reducti ons in required dividends would fall into the category of plans to reduce or del ay cash expenditures. (AU 341) ==> The auditor would consider management's plans to increase ownership equity, for example, through the issuance and sale of additional capital stock, as such plans would provide additional assets to the company. These assets would be needed to enable the company to continue in operation ==> Postponing a discretionary expenditure, such as an upgrade to the entity's I T system, would improve the entity's cash flow situation. Accordingly, this woul d help alleviate financial stress and is, therefore, considered a mitigating fac tor Going Concern Doubt - Communication w/ those with Governance 1. Nature of conditions identified; 2. The possible effect on financial statements and disclosures; and 3. The effect on the auditor's report. Bank Confirmation It verifies existence and ownership of bank accounts;

It also provides evidence about the completeness and terms of notes payable wit h bank. Cutoff Bank Statement Short period bank statement obtained directly from the bank (normally for a 10-d ay period) useful in verifying deposits in transit and providing some evidence a bout outstanding checks on the bank reconciliation. A cut-off bank statement is a regular bank statement that is prepared by the ban k for a shorter period than normal. It is sent directly to (or picked up by) the auditors. The cut-off bank statement is used by the auditors to verify the components of t he client's bank reconciliation. The correct answer is A-the auditor would trace the prior year checks clearing in the cut-off statement to the outstanding chec k list in the bank reconciliation as a means of verifying the completeness and a ccuracy of the outstanding check list. The reconciliation of the cut-off bank statement to the proof of cash is work do ne to verify the ending cash balance. While the ending cash balance does appear on the statement of cash flows, it would generally be verified by agreeing the b alance to the balance sheet. Check kiting Check kiting occurs when cash is fraudulently created through the transfer of mo ney between banks. Insufficient funds checks are written and deposited among a s eries of banks and the float is used to "create" cash. Kiting would be evidenced by a low average balance compared to a high level of d eposits because, although deposits are being made, checks are immediately writte n to remove the funds, resulting in a low average balance. Kiting occurs when transfers are made from one bank account to another, but the disbursing and receiving transactions are not recorded in the same time period. Check numbers 202 and 404 indicate kiting because both show a deposit recorded i n a period different from the disbursement. Sample Planning In planning the sample, the auditor must determine how many and how much, i.e., how many cash receipts and what dollar cut-off. Both are affected by materiality levels Standard Confirmation request - financial institutions The primary purpose of standard bank confirmations is to corroborate information regarding deposit and loan balances. A standard bank confirmation request, particularly the standard bank confirmatio n request for loan guarantee information, must be completed by an individual who is knowledgeable about the financial relationships and transactions that the ba nk has with the client. Otherwise, the usefulness of the confirmation is limited . Note: A standard bank confirmation would not be used to prepare a proof of cash. The information needed for a proof of cash would be provided by a bank statemen t, the general ledger, and other accounting records. --> Bank Confirmations: Cash in bank and collateral for loans are confirmed on t he bank confirmation Statement of Cash Flows auditing The amounts included in the statement of cash flows, e.g., beginning and ending cash balances, net income, and depreciation, must agree with the amounts in the other financial statements. This procedure, therefore, would likely be performed specifically in auditing the statement of cash flows. -->Reconcile the amounts included in the statement of cash flows to the other fi nancial statements' balances and amounts --> Much of the work done to audit the statement of cash flows consists of agree ing amounts included in the statement of cash flows to amounts reported in the o

ther financial statements. This would include, for example, agreeing depreciatio n expense to the amount reported in the income statement *Note: Reconciliation of the cut-off bank statements to verify the accuracy of t he year-end bank balances is a substantive procedure that would be performed on the cash balances in the balance sheet. It would not normally be performed speci fically to audit the statement of cash flows CASh - bank reconciliation - The first tickmark, & , is placed next to the balance per the bank. This balan ce would be confirmed directly with the bank (via the bank confirmation). - The second tickmark, W , appears next to Deposits in Transit. These deposits a re likely to appear on (and can thus be verified by tracing to) the cutoff bank statement from bank reconciliation - The last tickmark, TT , appears next to the NSF (insufficient funds) check ret urned by bank. The bank will alert the company about NSF checks by sending debit memos. The item can be verified by agreeing it to the bank debit memorandum. - The first tickmark, @ , is placed next to outstanding checks. The initial proc edure performed to verify outstanding checks is to trace them to the cutoff bank statement. The next step, for those outstanding checks that do not clear, is to trace them to the cash disbursements journal and to look at a check copy, vendo r invoice, purchase order, and other documentation related to the payment. - The second tickmark, E , appears next to the balance per the books. This balan ce will come from the Cash account in the general ledger. It should be agreed to the general ledger. - The last tickmark, Y , appears next to note collected directly by the bank. Th e bank will alert the company about direct deposits by sending credit memos. The item can be verified by agreeing it to the bank credit memorandum.