The attorney letter should request evidence relating to: • existence of conditions or circumstances indicating a possible loss from litigation, claims or assessments; • the period in which the underlying cause occurred; • likelihood of an unfavourable outcome; • amount of potential loss, including court costs.
12 Written representations by management • In instances when other sufficient appropriate audit evidence cannot reasonably be expected to exist, the auditor should obtain written representations from management on matters material to the financial statements. • The possibility of misunderstandings between the auditor and management is reduced when oral representations are confirmed in writing by management.
13 Review for contingent liabilities and commitments Contingent liability is a potential future obligation to an outside party for an unknown amount resulting from the outcome of a past event. Commitments are agreements that the entity will hold to a fixed set of conditions, such as the purchase or sale of merchandise at a stated price, at a future date, regardless of what happens to profits or to the economy as a whole.
14 Subsequent events Subsequent events are events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.
15 Types of events after the F/S Date IAS 10 deals with the treatment of financial statement events occurring after period end. It identifies two types of events: • Those that provide evidence of conditions that existed at the end of the reporting period (requires adjustment to the financial statements). • Those that are indicative of conditions that arose after the reporting period. (No adjustment, but, if material, requires disclosure.)
16 Events relating to conditions that existed at period end • Adjustments for a loss on a trade receivable account that is confirmed by the bankruptcy of a customer that occurs after the balance sheet date. • Settlement of litigation at an amount different from the amount recorded on the books. • Disposal of equipment not being used in operations at a price below current book value. • Sale of investments at a price below recorded cost.
17 Events not affecting conditions at period end • A decline in the market value of securities held for temporary investment or resale • Issuance of bonds or equity securities • A decline in the market value of inventory as a consequence of government action barring further sale of a product • An uninsured loss of inventories as a result of fire.
18 The auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures , which shall include the following: • Obtaining an understanding of any procedures management has established to ensure that subsequent events are identified.
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- Fall '19
- Balance Sheet