tailieunhanh - Lecture Auditing & assurance services (8e) - Chapter 17: Completing the audit engagement

After reading the material in this chapter, you should be able to: Be able to explain the audit issues related to contingent liabilities, know the audit procedures used to identify contingent liabilities, understand the audit issues related to a legal letter, be able to explain why the auditor must be concerned with client commitments,. | Chapter 17 Completing the Audit Engagement McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Review for Contingent Liabilities A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur. Probable: The future event is likely to occur. Reasonably Possible: The chances of the future event occurring is more than remote but less than probable. Remote: The chance of the future event occurring is slight. Examples Pending or threatened litigation Actual or possible claims and assessments Income tax disputes Product warranties or defects Guarantees of obligations to others Agreements to repurchase receivables that have been sold LO# 1 17- Audit Procedures for Identifying Contingent Liabilities Read minutes of meetings of the board of directors, committees of the board, and stockholders. Review contracts, loan agreements, leases, and correspondence from government agencies. Confirm or otherwise document guarantees and letters of credit. Inspect other documents for possible guarantees or other similar arrangements. Review tax returns, IRS reports, and schedules supporting the client’s income tax liability. LO# 2 17- Legal Letters A letter of audit inquiry (legal letter) sent to the client’s attorneys is the primary means of obtaining or corroborating information about litigation, claims, and assessments. LO# 3 17- Commitments Long-term commitments are usually identified through inquiry of client personnel during the audit of the revenue and purchasing processes. In most cases, such commitments are disclosed in a footnote to the financial statements. Long-term contracts to purchase raw materials or sell their products at a fixed price To obtain a favorable pricing arrangement To secure the availability of raw materials LO# 4 17- Review for . | Chapter 17 Completing the Audit Engagement McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Review for Contingent Liabilities A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur. Probable: The future event is likely to occur. Reasonably Possible: The chances of the future event occurring is more than remote but less than probable. Remote: The chance of the future event occurring is slight. Examples Pending or threatened litigation Actual or possible claims and assessments Income tax disputes Product warranties or defects Guarantees of obligations to others Agreements to repurchase receivables that have been sold LO# 1 17- Audit Procedures for Identifying Contingent Liabilities Read minutes of meetings of the board of directors, committees of the board, and .