Audit Ch.16

• Audit of Statement of Cash Flows


  Amounts are audited in conjunction with the audit of balance sheet and income statement accounts
• Audit of Statement of Cash Flows


  • Presentation and disclosure important audit objective is important
• Cash flow categories


  • Operating
  • Investing
  • Financing
• Loss contingencies


  Loss contingencies should be reflected in the financial statement amounts when:

  • It is probable that a loss had been sustained before the balance sheet date
  • The amount of the loss can be reasonably estimated

  Loss contingencies should be disclosed in the notes to the financial statements when it is at least reasonably possible that a loss has been sustained

  Loss contingencies need not be disclosed when the possibility of loss is remote
• Litigation


  Most common loss contingency - pending or threatened litigation
• Audit Procedures for Loss Contingencies

  Review the minutes of directors' meetings to the date of completion of fieldwork.

  2. Send letter of inquiry to client's lawyer

  3. Send confirmation letters to financial institutions to request information on contingent liabilities of the company.

  4. Review correspondence with financial institutions for evidence of accommodation endorsements, guarantees of indebtedness, or sales or assignments of accounts receivable.

  5. Review reports and correspondence from regulatory agencies to identify potential assessments or fines.

  Obtain a representation letter from the client indicating that all liabilities known to officers are recorded or disclosed.
• Do we need to get an update on the legal response or update the audit report?
• Procedures to Identify Subsequent Events

  1. Review latest available financial statements and minutes of the board and selected committees

  2. Inquiry about matters dealt with at meetings for which minutes are not available

  3. Inquiry of management

  4. Obtain lawyer's letter

  5. Obtain representations from management
• Management Representation Letter


  Purpose is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements

  Dated as of the date of the audit report

  Not a substitute for application of necessary audit procedures
• Misstatements


  Known misstatements - Specific misstatements identified during the course of the audit

  Likely misstatements - Due to extrapolation from audit evidence or differences in accounting estimates
• Material misstatements must be corrected
• Quantitative and qualitative factors are considered in evaluating misstatements
• Rollover


  The rollover method quantifies an error relative to the current year income statement effect
• Iron Curtain


  The cumulative effect of a misstatement in the balance sheet is considered, rather than just the impact of the misstatement in the current period
• Rollover and Iron Curtain methods result in a larger proportion of misstatements being considered material
• Review the Engagement


  Review of work of audit staff accomplished through review of audit working papers

  Typically performed by seniors

  Review of working papers not completed until near (of after) completion of fieldwork

  Partner and manager devote attention to accounts with higher risk of material misstatement

  Second partner review prior to issuance of audit report
• Required Communication with Those Charged with Governance

  • Auditor responsibility under generally accepted auditing standards (e.g., to form and express an opinion, and management's responsibilities)

  An overview of the planned scope and timing of the audit

  Significant findings from the audit

  Qualitative aspects of accounting practices

  Audit difficulties encountered

  Uncorrected misstatements

  Disagreements with management

  Management consultations with other accountants

  Auditor independence issues

  Other issues