sm_19

8/10/2019 sm_19

1/20

C HAPTER 19

C OMPLETING THE A UDIT / P OSTAUDIT R ESPONSIBILITIES

Learning Check

19-1. The three categories of activities in completing the audit are (a) completing field work, (b)evaluating the findings, and (c) communicating with the client.

19-2. The activities involved in completing the field work are (a) making subse uent events

review, (b) reading minutes of meetings, (c) obtaining evidence concerning litigation,claims, and assessments, (d) obtaining client representation letter, and (e) performinganal!tical procedures.

19-". a. #ubse uent events are events that occur between the balance sheet date and theissuance date of the auditor$s report (which is not the same as the date of the report)that ma! affect the financial statements on which the report is rendered. Thesubse uent events period e%tends from the balance sheet date to the end of fieldwork on the engagement.

b. The t!pes are&

T!pe 1 consists of those events that provide additional evidence with respect toconditions that e%isted at the date of the balance sheet and affect the estimates inherent inthe processof preparing financial statements.

T!pe 2 consists of those events that provide evidence with respect to conditionsthat did not e%ist at the date of the balance sheet but arose subse uent to thatdate.

T!pe 1 events re uire ad'ustment of the financial statements. T!pe 2 eventsre uire disclosure, and in ver! material cases, b! attaching pro-form data to thefinancial statements.

c. The auditor is re uired b! # to search for and to evaluate subse uent events upto the date of the auditor$s report, which should be as of the end of field work. Thisresponsibilit! is discharged b! (1) being alert for subse uent events in performing!ear-end substantive tests after the balance sheet date, and (2) performing specific

procedures at or near the completion of field work.

#olutions *anual to Modern Auditing: +op!right 2 , ohn ile! and #ons, /nc. 19-1

8/10/2019 sm_19

2/20

19-0. a. egarding litigation, claims, and assessments ( + ), the auditor should obtainevidential matter on The e%istence of a condition, situation, or set of circumstances indicating an uncertaint!

as to the possible loss to an entit! arising from the + . The period in which the underl!ing cause for legal action occurred. The degree of probabilit! of an unfavorable outcome. The amount or range of potential loss.

b. letter of audit in uir! is a letter sent b! management to the compan!$s outside legalcounsel re uesting the law!er to send specified information directl! to the auditorabout + against the compan!. The letter is the auditor$s primar! means ofobtaining evidence about + .

c. hen the law!er fails to respond, the auditor has a scope limitation. 3epending onmaterialit!, the auditor will e%press either a ualified opinion or a disclaimer ofopinion.

19-4. a. The ob'ectives of a 5rep5 letter are& (1) confirm oral representations given to theauditor, (2) document the continuing appropriateness of such representations, and (")reduce the possibilit! of misunderstandings concerning management$s representations.

b. hen the auditor is unable to obtain a rep letter or support a managementrepresentation that is material to the financial statements b! other audit procedures,there is a scope limitation. 3epending on materialit!, the auditor will e%press either aualified opinion or a disclaimer of opinion

19-6. a. The ob'ectives of an overall review are to assist the auditor in (1) assessingconclusions reached in the audit and (2) evaluating the financial statement

presentation taken as a whole.

b. The review should be made b! an individual having comprehensive knowledge ofthe client$s business and industr!. 7ormall!, either the partner in charge of the auditor the top manager on the engagement makes the review.

c. nal!tical procedures performed during the final stages of the audit should be pplied to critical audit areas identified during the audit. 8ased on financial statement data after all audit ad'ustments and reclassifications

have been recogni ed.s in other cases, the data ma! be compared to (1) e%pected compan! results, (2) available industr!data, and (") relevant nonfinancial data.

19-:. a. The two ob'ectives in evaluating the findings are determining (1) the t!pe of opinionto be e%pressed and (2) whether # has been met in the audit.


8/10/2019 sm_19

3/20

8/10/2019 sm_19

4/20

d. /f, after considering identified conditions and management$s plans, the auditorconcludes that substantial doubt about the entit!$s abilit! to continue as a goingconcern for a reasonable period of time remains, the audit report is normall! anun ualified audit opinion with an e%planator! paragraph about the uncertaint!

(following the opinion paragraph) to reflect that conclusion. The auditor$sconclusion about the entit!$s abilit! to continue as a going concern should bee%pressed through the use of the phrase 5substantial doubt about its (the entit!$s)abilit! to continue as a going concern.5 /f the auditor concludes that the entit!$sdisclosures with respect to the entit!$s abilit! to continue as a going concern areinade uate, a departure from generall! accepted accounting principles e%ists. Thisma! result in either a ualified (e%cept for) or an adverse opinion.

19-1 . The technical review of the financial statements includes matters pertaining to the form andcontent of each of the basic statements as well as to re uired disclosures. *ost +> firmsuse separate checklists for #A+ and non-#A+ clients. The auditor who performs the initial

review of the financial statements completes the checklists. The manager and partner incharge of the engagement (in the case of a publicl! held client then review the checklists, a partner who was not a member of the audit team) reviews them again.

19-11. a. The opinion to be e%pressed is determined b! the partner in charge of theengagement. The decision is made on the basis of the findings made b! the auditteam during the audit.

b. >roposed ad'ustments and disclosures are discussed with the client and differencesare resolved. @rdinaril!, agreement is reached and an un ualified opinion can bee%pressed.

19-12. a. The primar! reviewers and the nature of their reviews are&

eviewer 7ature of eview*anager eviews working papers prepared b! seniors and

reviews some or all of the working papers reviewed b!seniors.

>artner in chargeof engagement

eviews working papers prepared b! managers andreviews other working papers on a selective basis.

b. The engagement partner$s review of the working papers is designed to obtain

assurance that The work done b! subordinates has been accurate and thorough. The 'udgments e%ercised b! subordinates were reasonable and appropriate in the

circumstances. The audit engagement has been completed in accordance with the conditions and

terms specified in the engagement letter. ll significant accounting, auditing, and reporting uestions raised during the

audit have been properl! resolved.


8/10/2019 sm_19

5/20

The working papers support the auditor$s opinion. enerall! accepted auditing standards and the firm$s ualit! control policies and

procedures have been met.

c. The second partner ma! be more ob'ective than the partner on the engagement. Thus,

the second partner review provides additional assurance that # have been met.#econd partner reviews are mandator! for #A+ registrants.

19-1". The auditor$s communications with the client at the conclusion of the audit involve the auditcommittee of the board of directors (or the board directl!) and management.

19-10. a. eportable conditions represent significant deficiencies in the design or operation ofthe internal control structure, which could adversel! affect the organi ation$s abilit!to record, process, summari e, and report financial data consistent with the assertionsof management in the financial statements. The magnitude of a reportable conditiondetermines whether it is also a material weakness. material weakness is defined as

a reportable condition in which the design or operation of the specific internalcontrol structure elements does not reduce to a relativel! low level the risk thatmisstatements in amounts that would be material in relation to the financialstatements being audited ma! occur and not be detected within a timel! period b!emplo!ees in the normal course of performing their assigned duties.

b. report issued on reportable conditions should& /ndicate that the purpose of the audit is to report on the financial statements and

not to provide assurance on the internal control structure. /nclude the definition of reportable conditions. /nclude the restriction on distribution (e.g. restricted to the audit committee,

management, and others within the organi ation)./n addition, the reportable conditions should be described in one or more separate paragraphs.

19-14. hen the auditor separatel! identifies and describes material weaknesses in his or herreport, two additional paragraphs are re uired. The first paragraph should contain adefinition of the term material weakness and a description of the reportable conditions thatare material weaknesses. The second additional paragraph should describe the limitations ofthe auditor$s work, noting specificall! that the auditor$s consideration of the internal controlstructure would not necessaril! disclose all matters considered to be material weaknesses.

19-16. a. The communication ma! be oral or written, and it ma! occur during or shortl! afterthe audit.

b. The communication with the audit committee ma! include such matters as uditor$s responsibilities under #. #ignificant accounting policies. *anagement 'udgments and accounting estimates. #ignificant audit ad'ustments.


8/10/2019 sm_19

6/20

3isagreements with management. +onsultation with other accountants. *a'or issues discussed with management prior to retention. 3ifficulties in performing the audit.

/n addition, the auditor must communicate reportable conditions.

19-1:. a. The purpose of a management letter is to provide management withrecommendations for improving the efficienc! and effectiveness of its operations.

b. management letter ma! include comments on /nternal control matters that are not considered to be reportable conditions. *anagement of resources such as cash, inventories, and investments. @ther value-added recommendations on how to improve organi ation

performance. Ta% related matters.

19-1

8/10/2019 sm_19

7/20

#olutions *anual to Modern Auditing: +op!right 2 , ohn ile! and #ons, /nc. 19-:

8/10/2019 sm_19

8/20

19-2 . a. hen the auditor has been able to make a satisfactor! investigation and hasdetermined that the information is reliable, he or she should describe the effects thesubse uentl! ac uired information would have had on the financial statements andthe auditor$s report.

b. hen the client has not cooperated and the auditor has been unable to make asatisfactor! investigation, without disclosing the specific information, the auditorshould (1) indicate the lack of cooperation and (2) state that if the information is true,the audit report should no longer be relied on.

19-21. a. The auditor has no responsibilit! to make an! retrospective review of his or herwork. Bowever, when knowledge is obtained of possible omitted procedures, theauditor should assess their importance to his or her abilit! to support the previousl!e%pressed opinion.

b. The auditor ma! find that he or she (1) can support the opinion or (2) cannot support

the opinion. /n the latter case, the auditor should perform the omitted procedures andif necessar! prevent further reliance on the report.

Objective Questions

19-22. 1. b 2. a ". c19-2". 1. a 2. b ". b 0. c19-20. 1. a 2. c ". b

Comprehensive Questions

19-24. (Astimated time - 2 minutes)

a. The first t!pe of subse uent events includes those events that provide additionalevidence concerning conditions that e%isted at the balance sheet date and affect theestimates inherent in the process of preparing financial statements. This t!pe ofsubse uent events re uires that the financial statements be ad'usted b! an! changesin estimates resulting from the use of such additional evidence.

The second t!pe of subse uent events consists of those events that provide evidence concerningconditions that did not e%ist at the balance sheet date but arose subse uent to that date. These eventsshould not result in ad'ustment to the financial statements but ma! be such that disclosure isre uired to keep the financial statements from being misleading.

b. The auditing procedures reen should consider performing to gather evidenceconcerning subse uent events include the following&

#olutions *anual to Modern Auditing: +op!right 2 , ohn ile! and #ons, /nc. 19-

8/10/2019 sm_19

9/20

+ompare the latest available interim statements with the financial statements beingaudited.

scertain whether the interim statements were prepared on the same basis as theaudited financial statements.

/n uire whether there was an! significant change in the capital stock, long-termdebt, or working capital to the date of in uir!.

/n uire about the current status of items in the audited financial statements thatwere accounted for on the basis of tentative, preliminar!, or inconclusive data.

/n uire about an! unusual ad'ustments made since the balance sheet date. ead or in uire about the minutes of meetings of stockholders or the board of

directors. /n uire of the client$s legal counsel concerning litigation, claims, and

assessments. @btain a management representation letter, dated as of the date of reen$s report,

as to whether an! subse uent events would re uire ad'ustment or disclosure. *ake such additional in uiries or perform such additional procedures as reenconsiders necessar! and appropriate.

19-26. (Astimated time - " minutes)a. 1. subse uent events review is used to provide reasonable assurance that the

auditor is aware of significant events that have a material effect on financialstatements. These are events that have occurred after the date of the financialstatements but before the issuance of the audit report.

2. /f the subse uent event is one that provides additional evidence concerning

conditions e%isting at the date of the financial statements, then the financialstatements must be ad'usted. /f the subse uent event is one that providesevidence concerning conditions that arose after the date of the financialstatements, disclosure is re uired.

b. 1. The auditor obtains written representations from the client as part of theevidence gathered to meet the third standard of field work. The purpose ofthese written representations b! management is to +onfirm oral representations given to the auditor. /mpress on management that it has the primar! responsibilit! for the

financial statements.

2. The client representation letter ma! include statements concerning thefollowing matters& +ompleteness and availabilit! of the accounting records and minutes of

meetings of shareholders, directors, and committees. bsence of unrecorded transactions and errors and irregularities in the

financial statements. A%istence of related part! transactions or contingencies.


8/10/2019 sm_19

10/20

>lans or intentions that ma! affect the carr!ing value of assets andliabilities.

c. 1. The purpose of the management letter is to communicate to management theauditor$s recommendations regarding improvements in the efficienc! and the

effectiveness of matters that came to the auditor$s attention during the audit.

2. Three ma'or sub'ects that ma! be addressed in the management letter includethe following. /nternal control structure weaknesses that are considered immaterial. /mprovements to the accounting and information s!stem. /mprovements to the internal controls related to achieving the ob'ectives

of the organi ation.

19-2:. (Astimated time - 24 minutes)Item

No. Audit Procedures

Required isc!osure or

"ntr# and Reasons1. oods in-transit would be detected in the

course of the auditor$s review of the !ear-end cutoff of purchases. The auditor woulde%amine receiving reports and purchaseinvoices to make certain that the liabilit! tosuppliers had been recorded for all goodsincluded in inventor!, and that all goods forwhich the client was liable at !ear end wererecorded in inventor!.

The receipt of the goods provides additionalevidence with respect to conditions thate%isted at the date of the balance sheet andhence the financial statements should bead'usted to take into account such additionalinformation.

2. #ettlements of litigation would be revealed b! re uesting from the compan!$s legal

counsel a description and evaluation of an!litigation, impending litigation, claims, andcontingent liabilities of which he or she hasknowledge that e%isted at the date of the

balance sheet being reported upon, togetherwith a description and evaluation of an!additional matters of a like nature whichcome to his or her attention up to the datethe information is furnished. review ofcash disbursements for the period betweenthe balance sheet date and completion offield work ma! also reveal evidence of the

settlement.

#ettlements of litigation would re uire anad'ustment of the financial statements since

the events that gave rise to the litigation hadtaken place prior to the balance sheet date.


8/10/2019 sm_19

11/20

ItemNo. Audit Procedures

Required isc!osure or"ntr# and Reasons

". The purchase would normall! be evealedin general conversations with the client andwould further be detected b! reading theminutes of meetings of stockholders,directors, and appropriate committee. /naddition, because the amount paid is likel!to be unusuall! large in relation to othercash disbursements, a review of cashdisbursements for the period between the

balance sheet date and completion of fieldwork is likel! to reveal such ane%traordinar! transaction. *oreover,

because a purchase of a business usuall!re uires a formal purchase agreement, theletter from the firm$s legal counsel would

probabl! have revealed the purchase.

The purchase of a new business is not anevent that provides evidence with respect toconditions e%isting at the balance sheet dateChence, it does not re uire ad'ustments in thefinancial statements. Bowever, such an eventwould normall! be of such importance thatdisclosures of it is re uired to keep thefinancial statements from being misleading./f the ac uisition is significant enough, itmight be advisable to supplement thehistorical statements with pro-formastatements indicating the financial results ifthe two firms had been consolidated for the!ear ending 3ecember "1, 19D@. @therwise,disclosure in footnotes to the financialstatements would be ade uate. @ccasionall!,a situation of this t!pe ma! have such amaterial impact on the entit! that the auditorma! wish to include in the audit report ane%planator! paragraph directing the reader$sattention to the event and its effect.

0. /nventor! losses attributable to a floodwould be brought to the auditor$s attentionthrough in uires and discussions withcorporate officers and e%ecutives.*oreover, the auditor would know thelocation of the plants and warehouses ofclients and upon becoming aware of an!

ma'or floods in such a location, he or shewould investigate to determine if the client$sfacilities had suffered an! damage.

osses attributable to floods subse uent tothe balance sheet date to not provide information with respect to conditions thate%isted at the balance sheet dataC hence,ad'ustment in the financial statements is notre uired. Bowever, because the losses arematerial, the! should be revealed in

footnotes to the financial statements.@ccasionall!, situation of this t!pe ma! havesuch a material /mpact on the entit! that theauditor ma! wish to include in the auditreport an e%planator! paragraph directing thereader$s attention to the event and its effect.

4. The sale of bonds or other securities wouldre uire a filing with the #A+ in which theauditor would presumabl! be involved. /naddition, the sale would be revealed b!reading the minutes of directors and financecommittee$s meetings, b! corresponding

with the client$s attorne!s and b! e%aminingthe cash receipts books in the periodsubse uent to the balance sheet date forevidence of unusuall! large receipts.

#ales of bonds or capital stock aretransactions of the t!pe that do not provideinformation with respect to conditions thate%isted at the balance sheet dateC hence,ad'ustment of the financial statements is notre uired. Bowever, such sales ma! be of

sufficient importance to re uire footnotedisclosure. @ccasionall!, a situation of thist!pe ma! have such a material impact on theentit! that the auditor ma! wish to in theaudit report an e%planator! paragraphdirecting the reader$s attention to the eventand its effect.


8/10/2019 sm_19

12/20

8/10/2019 sm_19

13/20

compan!$s operations, the auditor must give a ualified opinion and possibl!consider a disclaimer of opinion.

0. 3isagree. /n some cases, attorne!s, auditors, and clients discuss matters involvinglitigation, and during such informal discussions some attorne!s e%press their

opinions as to the outcome of disputed matters. #uch oral opinions should bee%pressed in writing b! the attorne!, and if the! are not reduced to writing, thediscussions generall! should not be considered audit evidence.

4. 3isagree. The law firm derives all or substantiall! all of its fees from the client. Thisis, in essence, analogous to in-house counsel. Avidence from in-house counsel ma!

provide the auditor with the necessar! corroboration in some cases. Bowever, sincethe liabilit! here is great, complete reliance on such evidence is not 'ustified.

19-" . (Astimated time - 24 minutes)

Other matters that Alderman's representation letter should specifically confirm that: The financial statements referred to above are fairly presented in conformity with generally

accepted accounting principles. We have made available to you all

Financial records and related data. inutes of the meetings of stoc!holders" directors" and committees of directors" or

summaries of actions of recent meetings for which minutes have not yet been prepared. There are no material transactions that have not been properly recorded in the accounting

records underlying the financial statements. There has been no

Fraud involving management or employees who have significant roles in internal control. Fraud involving others that could have a material effect on the financial statements.

anagement believes that the effects of any uncorrected financial statement misstatementsaggregated by the auditor during the current engagement and pertaining to the latest periodpresented are immaterial" both individually and in the aggregate" to the financial statementsta!en as a whole.

The following have been properly recorded or disclosed in the financial statements: #elated$party transactions" including sales" purchases" loans" transfers" leasing

arrangements" and guarantees" and amounts receivable from or payable to related parties. %uarantees" whether written or oral" under which the company is contingently liable. &ignificant estimates and material concentrations !nown to management that are re uired to

be disclosed in accordance with the A()*A's &tatement of *osition +,$-" isclosure of)ertain &ignificant #is!s and /ncertainties.

There are no other liabilities or gain or loss contingencies that are re uired to be accrued ordisclosed by FA&0 &tatement 1o. 2.

The company has satisfactory title to all owned assets" and there are no liens or encumbranceson such assets nor has any asset been pledged as collateral.

The company has complied with all aspects of contractual agreements that would have amaterial effect on the financial statements in the event of noncompliance.

ebt securities that have been classified as held$to$maturity have been so classified due to thecompany's intent to hold such securities" to maturity and the company's ability to do so. All other

debt securities appropriately have been classified as available$for$sale or trading. *rovision has been made to reduce e3cess or obsolete inventories to their estimated netreali4able value.

)apital stoc! reserved for options" warrants" conversions" or other re uirements have beenproperly disclosed.

#olutions *anual to Modern Auditing: +op!right 2 , ohn ile! and #ons, /nc. 19-1"

8/10/2019 sm_19

14/20

19-"1. (Astimated time - " minutes)a. The use of overall anal!tical review at the final stages of an audit has two general

advantages to the +> & (1) a broad view is obtained of the date of the financialstatements, and (2) the +> $s attention is focused on e%ceptions or variations in thedata.

broad view of the data under audit is needed b! the +> to draw conclusions aboutthe data as a whole. *erel! looking at individual transactions ma! lead the auditorto overlook important variations in the underl!ing data. The application of anal!tical

procedures to the final data to obtain this broad view re uires a discerning anal!sisof the data, which results in overall conclusions upon which the +> $s auditsatisfaction rests. The +> is thus able to satisf! him or herself as to thereasonableness, validit!, and consistenc! of the data in view of the surroundingcircumstances.

The focusing of the +> $s attention on e%ceptions or variations in the data results in

a more efficient and economical audit because there is a reduction in the amount ofdetailed testing which would be re uired, in the absence of overall checks, touncover these e%ceptions or variations. ;urthermore, manipulations of accounts ma!

be revealed because the double-entr! bookkeeping s!stem e%tends the effects ofmanipulations to additional accounts, which will then bear a changed relationship toother accounts. /n addition, managerial problems and trouble spots will behighlighted for the +> and ma! lead to the opportunit! to be of additional serviceto the client.

b. The ratios that a +> ma! compute during an audit as overall checks on balancesheet accounts and related nominal accounts ma! include the following&

ccruals of individual e%penses to related total e%penses. +alculations of the entit!?s operating c!cle. /ndividual components of return on assets and return on e uit!. The impact of an entit!?s financing and investing activities. The abilit! of cash flow from operations to service debt and dividends. @ther measures of the entit!?s li uidit! and solvenc!.

c. 1. The possible reasons for a decrease in the rate of inventor! turnover includethe following& 3ecline in sales. /ncrease in inventor! uantities, intentional or unintentional. /ncorrect computation of inventor! because of errors in pricing,

e%tensions, or taking of ph!sical inventor!. /nclusion in inventor! of slow-moving or obsolete items. Arroneous cutoff of purchases. Arroneous cutoff of sales under the perpetual inventor! accounting

method. Fnrecorded purchases.


8/10/2019 sm_19

15/20

+hange in inventor! valuation method.2. The possible reasons for an increase in the number of da!s$ sales in receivable

include the following& +hange in credit terms. 3ecreasing sales. +hange in the sales mi% of products with different sales terms. +hange in mi% of customers. /mproper sales cutoff. Fnrecorded sales. apping. #lower collections caused b! tighter economic conditions or lowering of

the ualit! of the receivables.

19-"2. (Astimated time - 2 minutes)

a. eportable conditions are matters that come to an auditor$s attention, which, in theauditor$s 'udgment, should be communicated to the client$s audit committee or itse uivalent because the! represent significant deficiencies in the design or operationof the internal control structure, which could adversel! affect the organi ation$sabilit! to record, process, summari e, and report financial data consistent with theassertions of management in the financial statements.

*aterial weaknesses are reportable conditions in which the design or operation ofspecific internal control structure elements do not reduce, to a relativel! low level,the risk that errorsor irregularities in amounts that would be material in relation to the financial

statements being audited ma! occur and not be detected within a timel! period b!emplo!ees in the normal course of performing their assigned functions.

b. n auditor is re uired to identif! reportable conditions that come to the auditor$sattention in the normal course of an audit, but is not obligated to search forreportable conditions. The auditor uses 'udgment as to which matters are reportableconditions. >rovided the audit committee has acknowledged its understanding andconsideration of such deficiencies and the associated risks, the auditor ma! decidecertain matters do not need to be reported unless, because of changes in managementor the audit committee, or because of the passage of time, it is appropriate to do so.

+onditions noted b! the auditor that are considered reportable should be reported, preferabl! in writing. /f information is communicated orall!, the auditor shoulddocument the communication. The report should state that the communication isintended solel! for the information and use of the audit committee, management, andothers within the organi ation. The auditor ma! identif! and communicate separatel!those reportable conditions the auditor considers to be material weaknesses, but ma!not state that no reportable conditions were noted during the audit. eportableconditions ma! be communicated during the course of the audit rather than after the


8/10/2019 sm_19

16/20

audit is concluded., depending on the relative significance of the matters noted and-the urgenc! of corrective follow-up action.

19-"". (Astimated time - " minutes)

a. e$icienc# Proper %ording

1. /n completing our audit /n planning and performing our audit2. /ts internal control environment /ts internal control structure". 7ot to e%press an opinion 7ot to provide assurance0. The design and effectiveness

of the s!stem f internal controlThe internal control structure and itsoperation

4. Fnder # Fnder standards6. >otential weaknesses #ignificant:. To prepare financial

statements in conformit!To record, process, summari e, and reportfinancial data consistent with the assertionsof management in the financial statements.

8/10/2019 sm_19

17/20

in improving organi ational performance. management letter is rendered as aconstructive service to suggest improvements as well as point out deficiencies.

b. *an! t!pes of information can be covered in a management letter. The ma'or, broadareas which are presented and discussed in the management letter include& #uggestions for modif!ing and improving a client$s internal controls.

ecommendations for changes and improvements in accounting s!stems to better meet management$s information needs.

#uggestions for improving the management of resources such as cash,inventories, and investments.

+omments regarding ta% related matters.

detailed e%ample of a suggestion for improving business practices follows&

e understand that !our accounting s!stem offers discounts to customers who purchase in significant volumes. The program that grants these volume discounts asit prices a sales invoice does so after important information on gross margins has

been reported to department managers. hile sales invoices and underl!ingaccounting information is correct, it does not agree with management informationthat is provided to sales managers as the! make pricing decisions. s soon as

possible !ou need to change the program that calculates the sales discounts so thatgross margins and other information used b! sales management includes the volumediscounts offered customers.

( nswer updated from original /+* answer.)

19-"4. (Astimated time - " minutes)a. 1. 1--subse uent event during the subse uent event period re uiring ad'ustment.

2. 1--subse uent event during the subse uent event period re uiring ad'ustment.". 2--subse uent event during the subse uent event period re uiring disclosure.0. 2--subse uent event during the subse uent event period re uiring disclosure4. 1--subse uent event during the subse uent event period re uiring ad'ustment.6. 0--subse uent event occurring after field work but before issuance of report.:. 0--subse uent event occurring after field work but before issuance of report.

8/10/2019 sm_19

18/20

;or categories (") and (0), the auditor has no responsibilit! to make in uir! or to perform an! auditing procedures during this time period to discover subse uentevents. Bowever, if knowledge of such an event comes to the auditor$s attention, heor she should determine whether the event re uires ad'ustment of or disclosure in thefinancial statements.

;or categor! (4), the auditor has no responsibilit! for their discover!. Bowever, if theauditor becomes aware of such facts and the facts ma! have affected the report thatwas issued, the auditor is re uired to ascertain the reliabilit! of the information.

c. /nformation about the items would be obtained from the following&1. /n uir! of managementC client 5rep5 letter.2. eview of bad debt write-offs in anuar!.". eading of minutes.0. @bservation of fireC newspaper account of fireC in uir! of management.4. /n uir! of managementC law!er$s letterC and client 5rep5 letter.

6. eading of minutes.:. 7ewspaper stor! on takeoverC in uir! of management.

8/10/2019 sm_19

19/20

stockholders, and reading local newspapers. The details of the item would not haveto be disclosed as a separate footnote because all fi%ed assets of the corporation,including the right to the condemnation award, were to be sold as of *arch 1, 19D1.

2. /t is improbable that the +> would learn the source of the G24, unless it were

revealed in a discussion with the president or his personal accountant, or unless theauditor preparedthe president$s personal income ta% return, in which case the interest charges wouldhave led to his investigation of the use to which the funds were put. #etting out theloan in the balance sheet as a loan from an officer would be sufficient disclosure. Thesource from which the officer obtained the funds would not be disclosed because it isthe officer$s personal business and has no effect upon the corporation$s financialstatements. /ndeed, disclosure of the funds$ source might be construed as detrimentalto the officer.

". The additional liabilit! for the ore shipment would have been revealed b! +> $s

scanning of anuar! transactions. The +> $s regular e%amination of 19D@transactions and related documents such as purchase contracts would have causedhim or her to note the item for subse uent follow-up to determine the final liabilit!./n addition, the client$s letter of representation might have mentioned the potentialliabilit!. The item would not re uire separate disclosure b! footnote or otherwise andwould be handled b! ad'usting the financial statement accounts pa!able b! theamount of the additional charge, G9, 60

0. The +> might learn of the agreement to purchase the treasurer$s stock ownershipthrough in uiries of management and legal counsel, e%amination of the minutes ofthe meetings of the board of directors and stockholders, and subse uent reading ofthe agreement. The absence of the treasurer might also arouse the +>$s curiosit!.The details of the agreement would be disclosed in a footnote because the use ofcompan! cash for the repurchase of stock and the change in the amount of stock held

b! stockholders might have a heav! impact on subse uent !ears$ financialstatements. Fsuall! a management change, such as the treasurer$s resignation, doesnot re uire disclosure in the financial statements. The details underl!ing theseparation (personal disagreements and divorce) should not be disclosed becausethe! are personal matters.

4. Through in uiries of management, review of financial statements for anuar!,scanning of transactions, and observations, the +> would learn of the reduced salesand of the strike. 3isclosure would not be made in the financial statements of theseconditions because such disclosure might create doubt as to the reasons therefore andmisleading inference might be drawn.

6. The contract with *ammoth /ndustries would come to the +> $s attention throughin uiries of management and legal counsel, reading the minutes of the meetings ofthe board of directors and stockholders, and e%amination of the contract. llimportant details of the contract should be disclosed in a footnote because of the


8/10/2019 sm_19

20/20

great effect upon the corporation$s future. The factors contributing to the entr! intothe contract need not be disclosed in the statementsC while the! might be of interestto readers, the! are b! no means essential to make the statements not misleading.

19-"

Documents

sm_19