AEB14SMCH24v1+GE.docx

1、AEB14SMCH24v1+GEChapter 24Audit Completion Review Questions24-1 There are four presentation and disclosure-related audit objectives:PRESENTATION AND DISCLOSURE-RELATED AUDIT OBJECTIVESDESCRIPTIONOccurrence and rights and obligations Account-related information as described in the footnotes exists an

2、d represents the rights and obligations of the company.CompletenessAll required disclosures are included in the financial statement footnotes.Accuracy and valuationFootnote disclosures are accurate and valued correctly.Classification and understandabilityAccount balances are appropriately classified

3、 and related financial statement disclosures are understandable.24-2 A financial statement disclosure checklist is an audit tool that summarizes all disclosure requirements contained in accounting standards. Auditors use the disclosure checklist to determine that all required disclosures are complet

4、ely presented and disclosed in the financial statements and accompanying footnotes. This helps the auditor obtain sufficient appropriate evidence about the completeness objective for the presentation and disclosure-related audit objective.24-3 A contingent liability is a potential future obligation

5、to an outside party for an unknown amount resulting from activities that have already taken place. Some examples would be: Pending litigation Income tax disputes Product warranties Notes receivable discounted Guarantees of obligations of others Unused balances of outstanding letters of credit24-3 (c

6、ontinued) An actual liability is a real future obligation to an outside party for a known amount from activities that have already taken place. Some examples would be: Notes payable Accounts payable Accrued interest payable Income taxes payable Payroll withholding liabilities Accrued salaries and wa

7、ges24-4 If you are concerned about the possibility of contingent liabilities for income tax disputes, there are various procedures you could use for an intensive investigation in that area. One approach would be an analysis of income tax expense. Unusual or nonrecurring amounts should be investigate

8、d to determine if they represent situations of potential tax liability. Another helpful procedure for uncovering potential tax liabilities is to review the general correspondence file for communication with attorneys or IRS agents. This might give an indication that the potential for a liability exi

9、sts even though no actual litigation has begun. Finally, an examination of internal revenue agent reports from prior years may provide the most obvious indication of disputed tax matters.24-5 The auditor would be interested in a clients future commitments to purchase raw materials at a fixed price s

10、o that this information could be disclosed in the financial statements. The commitment may be of interest to an investor as it is compared to the future price movements of the material. A future commitment to purchase raw materials at a fixed price may result in the client paying more or less than t

11、he market price at a future time.24-6 The analysis of legal expense is an essential part of every audit engagement because it may give an indication of contingent liabilities which may become actual liabilities in the future and require disclosure in the current financial statements. Since any singl

12、e contingency could be material, it is important to verify all legal transactions, even if the amounts are small. After the analysis of legal expense is completed, the attorneys to whom payment was made should be considered for letters of confirmation for contingencies (attorney letters).24-7 Pyson

13、should determine the materiality of the lawsuits by requesting from Merrills attorneys an assessment of the legal situations and the probable liabilities involved. In addition, Pyson may have his own attorney assess the situations. Proper disclosure in the financial statements will depend on the att

14、orneys evaluations of the probable liabilities involved. If the evaluations indicate highly probable, material amounts, disclosure will be necessary in the form of a footnote, assuming the amount of the probable material loss cannot be reasonably estimated. If the client refuses to make adequate dis

15、closure of the contingencies, a qualified or adverse opinion may be necessary.24-8 An asserted claim is an existing legal action that has been taken against the client, whereas an unasserted claim represents a potential legal action. The clients attorney may not reveal an unasserted claim for fear t

16、hat the disclosure of this information may precipitate a lawsuit that would be damaging to the client, and that would otherwise not be filed.24-9 If an attorney refuses to provide the auditor with information about material existing lawsuits or likely material unasserted claims, the audit opinion would have to be modified to reflect the lack of available evidence. This is required by auditing standard