cpa audit ch 14 review 14
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Subsequent events are defined as events that occur subsequent to the
Balance sheet date but prior to the auditor’s report date
Subsequent events occur between the date of the financial statements and the date of the auditor’s report. The auditor should perform procedures to determine whether subsequent events that require adjustment of, or disclosure in, the statements are appropriately reflected in the statements in accordance with the applicable financial reporting framework (AU-C 560).
Would the following statement extracted from entity’s legal counsel’s letter regarding litigation, claims, and assessments most likely would cause the auditor to request clarification?
“I believe that the plaintiff will have problems establishing any liability.”
yes -- The letter of inquiry requests, among other things, that legal counsel evaluate the likelihood of unfavorable outcomes of pending or threatened litigation, claims, and assessments. It also requests that legal counsel estimate, if possible, the amount or range of potential loss (AU-C 501). Thus, the auditor is concerned about the amount of the expected settlement as well as the likelihood of the outcome. However, the statement that the plaintiff will have problems establishing any liability is unclear. For example, a plaintiff may have problems yet still prevail
would an auditor most likely perform the following procedure regarding litigation?
Discuss with management its policies and procedures for identifying and evaluating litigation.
yes --- Management is responsible for adopting policies and procedures for identifying, evaluating, and accounting for litigation, claims, and assessments. Thus, the auditor inquires of management about these matters. The auditor also obtains written representations that all known actual or possible litigation, claims, and assessments that should be considered in preparing the statements have been disclosed and accounted for in accordance with the applicable reporting framework.
The appropriate date for the client to specify as the effective date in the audit inquiry to legal counsel is
As close to the date of the auditor’s report as possible.
The date of legal counsel’s response should be as close to the date of the auditor’s report as practicable. The auditor is concerned with events occurring through the date of the report that may require adjustment to, or disclosure in, the financial statements. The date of the report is the date on which the auditor obtained sufficient appropriate audit evidence on which to base the opinion. Moreover, the auditor should specify the earliest acceptable effective date of the response and the latest date by which it is to be sent to the auditor. A 2-week period between these dates generally suffices.
“In connection with an audit of our financial statements, management has prepared, and furnished to our auditors, a description and evaluation of certain contingencies.” The foregoing passage most likely is from a
Audit inquiry letter to legal counsel.
AU-C 501 provides an illustrative audit inquiry letter to legal counsel. The following is its first paragraph:
In connection with an audit of our financial statements at (balance sheet date) and for the (period) then ended, management of the Company has prepared, and furnished to our auditors (name and address of auditors), a description and evaluation of certain contingencies, including those set forth below involving matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf of the Company in the form of legal consultation or representation. These contingencies are regarded by management of the Company as material for this purpose (management may indicate a materiality limit if an understanding has been reached with the auditor). Your response should include matters that existed at (balance sheet date) and during the period from that date to the date of your response.
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