cpa audit ch 14 review 3
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Kirk Keller, CPA, was about to express an unmodified opinion on the audit of Lupton Television Broadcasting Company when he received a letter from Lupton’s independent counsel. The letter stated that the Federal Communications Commission has notified Lupton that its broadcasting license will not be renewed because of some alleged fraud in its broadcasting practices. Lupton cannot continue to operate without this license. Keller has also learned that Lupton and its independent counsel plan to take all necessary legal action to retain the license. The letter from the independent counsel, however, states that a favorable outcome of any legal action is highly uncertain. Based on this information, Keller should
Express an unmodified opinion with disclosure of the event in a separate emphasis-of-matter paragraph of his report.
According to AU-C 570, an evaluation should be made as to whether substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed 1 year beyond the date of the financial statements. If the auditor reaches this conclusion after identifying conditions and events that create such doubt and after evaluating management’s plans to mitigate their effects, (s)he should consider the adequacy of disclosure and include an emphasis-of-matter paragraph (after the opinion paragraph) in the report. This paragraph should use the phrases “substantial doubt” and “going concern,” but it should not contain conditional language. If the entity’s disclosure is inadequate, the material misstatement requires modification of the opinion. By itself, however, the substantial doubt does not require a modified opinion or a disclaimer of opinion. But AU-C 570 does not preclude issuing a disclaimer of opinion in cases involving uncertainties.
An auditor should obtain written representations from management about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by
Management and the auditor.
Management’s representations may be limited to matters that are considered individually or collectively material if management and the auditor have reached an understanding about materiality. Such limitations do not apply to certain representations not directly related to amounts in the financial statements, e.g., acknowledgment of responsibility for fair presentation, availability of records, and fraud involving management and persons with significant roles in internal control.
Is the following a audit procedure that the auditor performs with respect to litigation, claims, and assessments?
Confirm directly with the client’s legal counsel that all claims have been recorded in the financial statements.
no -- Legal counsel’s expertise does not extend to accounting matters. Legal counsel evaluates whether claims may be asserted and the likelihood and magnitude of the outcomes. These evaluations bear upon accounting and reporting decisions, for example, whether disclosure only or recognition of a contingent liability is required. But all claims do not necessarily require recognition, and legal counsel does not have information about the content of financial statements that have not been issued.
Would an auditor apply materiality limits when obtaining specific written management representations for the following?
Fraud involving employees with significant roles in internal control.
no --- Management’s representations may be limited to matters that are considered individually or collectively material if management and the auditor have reached an understanding about materiality for this purpose. Materiality considerations do not apply to certain representations not directly related to amounts in the financial statements, for example, representations about the premise of the audit (i.e., acknowledgment of responsibility for fair presentation, internal control, and auditor access to information and people). Materiality also does not apply to knowledge of fraud or suspected fraud affecting the entity involving (1) management, (2) employees with significant roles in internal control, or (3) others if the fraud could materially affect the statements (AU-C 580).
would an auditor obtain written management representations for the following?
Management’s compliance with contractual agreements that may affect the financial statements.
yes --- The auditor should obtain written representations in the form of a management representation letter to complement other auditing procedures. In addition to certain required written representations, the auditor may decide that requesting certain other representations is necessary. These may include aspects of contracts that may affect the statements, including noncompliance (AU-C 580).
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