Auditing (Theoretical Concepts) - PSA 501, 550, 560, 570 and 580 FAR EASTERN UNIVERSITY Completing the Audit and Post Audit Responsibilities Completing the Audit \Wrapping-up procedures and review of the audit conclusion prior to issuance of the report is performed during this phase, Procedures generally performed during this phase of the audit process include the following: + Perform procedures, Including Inquiry of entity's legal counsel, to identify loss contingencies + Perform final review stage analytical procedures + Search for unrecorded liabilities + Perform review for related parties + Perform review for subsequent events that may affect the financial statements under audit + Review of entity's ability to continue as a "going concern” entity + Review of working papers performed by manager, partner and possibly a second partner review + Review of adequacy of disclosures using a disclosure checklist that lists all specific disclosures required by PFRS and the SEC, if appropriate + Evaluate auait findings + Communicate with the audit committee + Obtain management representation letter + Forming an audit opinion Example of a Management Representation Letter (Entity Letterhead) (pate) (To Auditor) This representation letter is provided in connection with your audit of the financial statements of ABC Company for the year ended December 31, 2015 for the purpose of expressing an opinion as to whether the financial statements Drasent fairly, in all material respects, in accordance with Philippine Financial Reporting Standards. \We confirm, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves: Financial Statements + We have fulfilled our responsibilities for the preparation and presentation of the financial statements as set out in the terms of the aucit engagement dated insert dete] and, in particuler, the financial statements are fairly presented in accordance with Philippine Financial Reporting Standards, ‘+ Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable. (PSA 540 Revised and Redrafted) ‘+ Related party relationships and transactions have been appropriately accounted for and disclosed In accordance with the requirements of Philippine Financial Reporting Standards. (PSA 550 Revised and Redrafted). + All events subsequent to the date of the financial statements and for which Philigpine Financial Reporting ‘Standards require adjustment or disclosures have been adjusted or disclosed. (PSA 560 Redrafted) +The effects of uncorrected misstatements are Immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter. + [Any other matters that the auditor may consider appropriate.) Information Provided 7 We have provided you with {ill information, such as records and documentation, and other matters that are relevant to the preparation ‘and presentation of the financial statements; ‘Additional information that you have requested from us; and Unrestricted access to those within the entity ‘+ Alltransactions have been recorded in the accounting records and are reflected in the financial statements, We have discloses to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. (PSA 240 Redrafted). + We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves: Management; Employees ho have significant roles in internal control; oF © Others where the fraud could have a material effect on the financial statements. (PSA 240 Redrafted) ‘+ We have disclosed to you all information in relation to allegations of fraud, or suspected freud, affecting the entity’ financial statemients communicated by employees, former employees, analysts, regulators or others, (PSA 240 Redrafted) + We have disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements. (PSA 250 Redrafted) + We have disclosed to you the identity of the entity's related parties and all the related party relationships and transactions of which we are aware. (PSA 550 Revised and Redrafted) ‘+ [Any other matters that the auditor may consider necessary.) Pride Totten Management Management ‘Auditing by Raymund Francis Escala HANDOUT 43 Page a of 15‘Auditing (Theoretical Concepts) ~ PSA 501, 550, 560, 570 and 580 PSA-501 Redrafted: Audit Evidence - Specific Considerations for Selected Items - Litigations and Claims 4. The primary source of information to be reported about tigation, claims, and assessments is the A. Client's lawyer C. Court records B. Client's management . Independent auditor 2. The auditor considers the status of legal matters up to the ‘A. date of the audit report Issuance of financial statements BL reporting date D. date of receipt of letter from lawyers 3. The audit inquiry letter to the client's lagal counsel should be mailed only by the ‘A. Client after the auditor has reviewed it for appropriate content. B. Auditor after preparation by the client and review by the auditor. C. Auditor's attorney after preparation by the client and review by the auditor. D. Client after review by the auditor's attorney. 4. The primary reason an auditor request that letters of Inquiry be sent to a client's attorney's Is to provide the auditor with ‘A. A descriation and evaluation of litigation, claims, and assessments that existed at the reporting date, B. Corroboration of the information furnished by management about litigation, claims, and assessments. C. The attorneys’ opinions of the client's historical experiences in recent similar litigation . The probable outcome of asserted claims and pending or threatened litigation, 5. The following statements relate to the auditor's inqulry regarding litigation and claims. Which is correct? ‘A. The auditor considers the status of legal matters up to the reporting dete. B. When litigation or claims have been identified or when the auditor believes they may exist, the auditor shoula seek direct communication with entity's laueyers. CC. The letter of aucit inquiry, which should be prepared by the auditor and sent by management, should request the lawyer to communicate directly with the auditor. D. If management refuses to give the auditor permission to communicate with the entity's ayers, this would be a scope limitation and should ordinarily lead to a qualified or adverse opinion. 6. In which of the following circumstances would an ausltor least likely meet with the client's legal counsel to discuss the likely outcome of the litigation and claims? ‘A. The Subject matter of the litigation Is complex. B. The auditor determines that the matter Is an insignificant risk. The subject matter of the litigation Is considered material and pervasive. . ‘There is a disagreement between management and the entity's legal counsel. 7. ACPA has received an attorney's letter in which no significant disagreements with the client's assessments of ‘contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should alert the auditor that ‘An adverse opinion will be necessary. Undisciosed unasserted claims may have arisen. ‘The auditor must begin ¢ completely new examination of contingent liabilities. The attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments. oopp 8. An attorney responding to an auditor as a result of the client's letter of audit inquiry may appropriately limit the response to tems which have high probability of being resolved to the client's detriment. ‘Asserted claims and pending or threatened litigation Legal matters subject to unsettled points of law, uncorroborated information, or other complex judgments. Matters to which the attorney has given substantive attention in the form of legal consultation or representation. opr 9. Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? ‘A. “believe that the plaintf’s case against the company is without merit.” B. “T believe that the possible liability to the company is nominal in amount.” C. “Tbelieve that the company wil be able to defend this action successfully.” D. “Tbelieve that the action can be settied for less than the damages claimed. 10, Management's refusal to give the auditor permission to communicate with the entity's legal counsel Is most likely to lead to A. An adverse opinion . A qualified opinion or an adverse opinion B. An unmodified opinion A qualified opinion or a disclaimer of opinion Search for Unrecorded Liabilities 11. The auditors’ search for unrecorded liabilities Is completed: A. During an interim period . Subsequent to the reporting date B. At the reporting date D. At any time during the examination 12. The assertion most directly addressed when performing the search for unrecorded liabilities is ‘A. Completeness B. Existence Right D. Presentation and disclosure 13, Which of the following procedures for detecting unrecorded transactions at the cl least likely to result in discovery of an unrecorded year-end account payable? ‘A. Examination of invoices received after year-end, B._ Examination of vouchers payable entered in the January voucher register. Examination of January receiving reports prepared for goods shipped FOB destination in December to the D, t's December 31 year-end is client. Confirmation of year-end accounts payable. ‘Auditing by Raymund Francis Escala HANDOUT 13 Page 2 of 15‘Auditing (Theoretical Concepts) ~ PSA 501, 550, 560, 570 and 580 14, Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Reviewing cash disbursements recorded subsequent to the reporting date to determine whether the related payables apply to the prior period Investigating payables recorded just prior to and just subsequent to the reporting date to determine whether they are supported by receiving eports. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. Reconciling vendors’ statements to the fle of receiving reports to identify items received just prior to the reporting date, 15. Which of the following audit procedures is least likely to detect an unrecorded liability? ‘A. Mailing of @ cash confirmation form. 8. Analysis and recomputation of interest expense. CC. Analysis and recomputation of depreciation expense. . Reading of the minutes of meetings of the board of directors. PSA 520 Redrafted: Analytical Procedures ~ Final Stage 16. Which of the following statements regarding analytical procedures is incorrect? A. It's used to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures. It is used to assist the auditor in evaluating the operating effectiveness of the different controls designed and implemented by the entity It is used to obtain evidential matter about particular assertions related to account balances or classes of transactions: D. It is used as an overall review of the financial information in the final review stage of the aut 47. The primary objective of analytical procedures used in the overall review stage of an audit is to A. Identify areas that represent specific risks relevant to the audit. B. Assist the auditor in assessing the validity of the conclusions reached, CC. Obtain evidence from details testing to corroborate particular assertions. Satisfy doubts when questions arise about a clients ability to continue in existence. 18. Analytical procedures in the overall review should be: ‘A. Applied to every item on the financial statements, 'B._Performed by the partner or manager on the engagement C._ Based on financial statement data before all audit adjustment and reclassifications have been recognized 1. Performed only when material misstatement is expected 19. Analytical procedures used in the overall review stage of an audit generally include ‘A. Considering unusual or unexpected account balances that were not previously identified B. Gathering evidence concerning account balances that have not changed from the prior year CC. Performing test of transactions to corroborate management's financial statement assertions 1. Re-testing control procedures that appeared to be ineffective during the assessment of control risk 20, Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a satisfactory explanation, the auditor must assume that there is a high probability that an error or irregularity exists. In this case, the auditor must A Issue either a qualified or an adverse opinion 5. Issue a disclaimer CC. Issue either @ qualified opinion or a disclaimer 1. Design other appropriate audit procedures to determine if such errors do exists PSA 550 Revised and Redrafted: Related Parties 21. It refers to a person or entity that has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions gn A. Related party transactions C. Related party B. Related party relationship D. Parent 22, It isa transfer of resources or obligations between related parties, regardless of whether a price is charged. A. Related party transactions C. Related party B. Related party relationship D. Parent 23, Which of the following is not a related party of an entity? A. An associate of the entity. B. Chief executive officer of the entity. C._Asshareholder owning 20% of the ordinary shares. . A financial institution providing banking facilties to the entity. 24, Statement 1: Relationships between a parent and its subsidiaries shall be disclosed only if there are transactions between them. ‘Statement 2: An entity shall disclose the name of its parent and, if different, the ultimate controling party A. True, True B. True, False C. False, True D. False, False 25. The responsibility for the identification and disclosure of related parties and transactions with such parties rests with the A. Auditor C. Financial Reporting Standard Council (FRSC) B._Entity’s management D. Securities and Exchange Commission (SEC) 26, Which of the following auditing procedures most likely would assist an auditor in identifying related patty transactions? Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. \Vouching accounting records for recurring transactions recorded just after the balance sheet Reviewing confirmations of loans receivable and payable for indications of guarantees. Performing anaSytical procedures for indications of possible financial difficulties. gopp ‘Auditing by Raymund Frands Escala HANDOUT 13 Page 3 of 15