Litigation and Claims in Auditing
37 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is one of the actions an auditor must take when attending a physical inventory count?

  • Randomly select items for immediate sale
  • Conduct interviews with all employees present
  • Prepare a financial statement draft
  • Evaluate management’s instructions for counting (correct)

    • If an auditor cannot attend the physical inventory count on the planned date, what should they do?

  • Prepare a report based on prior year’s data
  • Attend a later date and perform audit procedures (correct)
  • Skip the inventory procedures entirely
  • Request an extension from management

    • What should an auditor do if attendance at the physical inventory is impracticable?

  • Obtain audit evidence through alternative procedures (correct)
  • Wait for the next audit period
  • Send a letter to inventory management
  • Assume that the inventory is accurate

    • What may occur if the auditor cannot obtain sufficient appropriate evidence about inventory?

    <p>The auditor must modify the opinion in the report</p> Signup and view all the answers

    What is the first step an auditor should take to identify potential litigation and claims involving the entity?

    <p>Inquiry of management and others within the entity</p> Signup and view all the answers

    How can an auditor obtain evidence regarding inventory in the custody of a third party?

    <p>Request confirmation from the third party</p> Signup and view all the answers

    When conducting an audit, what should the auditor do if they assess a risk of material misstatement regarding litigation?

    <p>Send a letter of general inquiry to the entity’s external legal counsel</p> Signup and view all the answers

    What is included in a letter of general inquiry sent to the entity's external legal counsel?

    <p>A request for information on any litigation and claims, including outcomes and financial implications</p> Signup and view all the answers

    What should an auditor do if they suspect the external legal counsel will not appropriately respond to a letter of general inquiry?

    <p>Send a letter of specific inquiry instead</p> Signup and view all the answers

    Which of the following is NOT a method for the auditor to identify litigation and claims?

    <p>Direct negotiation with external lawyers</p> Signup and view all the answers

    What happens if management refuses to allow the auditor to communicate with the entity's lawyers?

    <p>This creates a scope limitation, leading to a qualified opinion or disclaimer</p> Signup and view all the answers

    What kind of information should a letter of specific inquiry request from the external legal counsel?

    <p>Details on litigation, assessments, and confirmation of management's evaluations</p> Signup and view all the answers

    Which factor increases the risk of material misstatement when accounting estimates are involved?

    <p>Inconsistency with historical accounting patterns.</p> Signup and view all the answers

    What is the main responsibility of management regarding accounting estimates?

    <p>To make reasonable estimates and disclosures in financial statements.</p> Signup and view all the answers

    Which type of letter is prepared by management and sent by the auditor to request information from external legal counsel?

    <p>Letter of general inquiry</p> Signup and view all the answers

    What should an auditor do first if management refuses to allow confirmation requests?

    <p>Inquire about management's reasons for the refusal.</p> Signup and view all the answers

    How should the auditor assess the implications of management's refusal of confirmation requests?

    <p>Through evaluating relevant risks of material misstatement.</p> Signup and view all the answers

    What does PSA 540 require the auditor to obtain regarding accounting estimates?

    <p>Sufficient appropriate audit evidence.</p> Signup and view all the answers

    Which characteristic must an estimate possess to be considered reasonable in circumstances?

    <p>Objective and not susceptible to bias.</p> Signup and view all the answers

    What should auditors consider when planning the nature, timing, and extent of audit procedures related to accounting estimates?

    <p>Their understanding of management's methods and controls.</p> Signup and view all the answers

    What should the auditor perform to obtain relevant and reliable audit evidence if management refuses confirmations?

    <p>Alternative procedures.</p> Signup and view all the answers

    Under what circumstance is a 100% examination necessary?

    <p>When the population consists of a small number of large value items.</p> Signup and view all the answers

    Which of the following is a method of selecting specific items for testing?

    <p>Choosing items that are high value or key items.</p> Signup and view all the answers

    What is the purpose of audit sampling?

    <p>To draw conclusions about an entire population based on a sample.</p> Signup and view all the answers

    Which type of audit evidence is generally considered the least reliable?

    <p>Inquiry about the application of a control.</p> Signup and view all the answers

    If audit evidence from one source is inconsistent with another, what must the auditor do?

    <p>Modify or add to audit procedures as necessary.</p> Signup and view all the answers

    When is audit evidence more reliable?

    <p>When it is obtained from independent sources outside the entity.</p> Signup and view all the answers

    What is a reason for conducting a 100% examination of a population?

    <p>The population comprises high-value items with significant risk.</p> Signup and view all the answers

    Which of the following statements about reliability of audit evidence is correct?

    <p>Internal evidence is more reliable when effective controls are present.</p> Signup and view all the answers

    What constitutes audit evidence in the auditor's opinion formation process?

    <p>Information from accounting records and other relevant data</p> Signup and view all the answers

    Which of the following is NOT typically considered an accounting record?

    <p>Minutes of meetings</p> Signup and view all the answers

    When evaluating the work of a management’s expert, which of the following is NOT a required consideration for the auditor?

    <p>The pricing strategy of the expert's services</p> Signup and view all the answers

    What should the auditor primarily assess regarding the information produced by the entity?

    <p>The reliability for the auditor's purposes</p> Signup and view all the answers

    Which of the following is an example of 'other information' that can be used as audit evidence?

    <p>Analysts' reports</p> Signup and view all the answers

    What aspect should the auditor evaluate regarding the relevance and reliability of information used as audit evidence?

    <p>The accuracy and completeness of the information</p> Signup and view all the answers

    Which of the following records would best support cost allocations in auditing?

    <p>Supporting worksheets and spreadsheets</p> Signup and view all the answers

    What is essential for the auditor to consider when designing audit procedures?

    <p>The relevance and reliability of the information</p> Signup and view all the answers

    Study Notes

    Litigation and Claims

    • Auditors need to identify litigation and claims that may materially misstate the financial statements.
    • Auditors may inquire of management and legal counsel, review meeting minutes and legal expense accounts to assess risks and identify relevant events.
    • If a risk of material misstatement is identified, auditors should send a letter of general inquiry to the entity's external legal counsel to confirm the existence and implications of litigation and claims.
    • A letter of specific inquiry may be needed if external legal counsel is unlikely to respond to a general inquiry.
    • Refusal from management to allow communication with the entity's lawyer can restrict the audit scope and result in a qualified audit opinion or a disclaimer of opinion.
    • If management refuses to allow the auditor to request a confirmation, the auditor should inquire about the reasons, evaluate the implications of the refusal, and perform alternative procedures to obtain evidence.

    Auditing Accounting Estimates

    • An accounting estimate is an approximation of an amount when a precise measurement is unavailable.
    • Management is responsible for making accounting estimates and disclosures.
    • The risk of material misstatement is higher when accounting estimates are involved.
    • The auditor should ensure accounting estimates are reasonable, properly accounted for, and appropriately disclosed.
    • To assess the reasonableness of an estimate, the auditor should consider the objectivity, historical patterns, and consistency with industry guidelines of the assumptions involved.

    Audit Evidence – Specific Considerations for Selected Items

    • Inventory: Auditors perform physical inventory counting to obtain sufficient evidence regarding inventory existence and condition, and review the final inventory records for accuracy.

    • For inventory held by third parties, auditors may request confirmation from the third party or perform inspection procedures.

    • Sampling Methods:

      • 100% examination may be appropriate for smaller populations, significant risks, or repetitive tasks.
      • Specific items, such as high-value items or those over a certain amount, can be selected.
      • Audit sampling is used to draw conclusions about a population based on a sample selected from it.

    • Reliability of Audit Evidence:

      • Evidence from independent sources is more reliable than internal evidence.
      • Evidence generated internally is more reliable when controls are effective.
      • Direct observation is more reliable than indirect or inferred evidence.
      • Documentary evidence is more reliable than oral representations.

    Gathering Audit Evidence

    • Auditors gather sufficient and appropriate audit evidence to support their opinion on the financial statements.
    • Audit evidence can be obtained from accounting records, supporting documents (invoices, contracts), and other information (meeting minutes, confirmations, analysts' reports, benchmarking data, control manuals).
    • The auditor should consider the relevance and reliability of the evidence when designing and performing procedures.
    • When using work produced by management's expert, the auditor should evaluate the expert's competence, capabilities, and objectivity.
    • When using information produced by the entity, the auditor should evaluate its accuracy, completeness, precision, and detail for the audit's purposes.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    AT07 Gathering Audit Evidence PDF

    Description

    This quiz focuses on the crucial role auditors play in identifying litigation and claims that could impact financial statements. It covers the procedures auditors should follow, including inquiries with management and legal counsel, and the implications of management's refusal to communicate with external lawyers. Test your understanding of these essential auditing practices!

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser