Assume that Custer & Custer was delayed a month in completing the collection of audit evidence. What actions would be appropriate relating to gathering evidence about potential contingencies?
What will be an ideal response?
Given the information contained in the solution to question 5, the auditor should consider requesting
the outside attorney to update in writing the attorney’s earlier response. This would be particularly
appropriate if events related to the case have occurred, such as depositions taken, offers of proposed
settlements received, or the trial has started. In some cases, the auditor may conclude that a discussion
about the case with the outside attorney may be sufficient. AU-C Section 501, “Audit Evidence -
Specific Considerations for Selected Items,” notes that in special circumstances, the auditor may obtain
a response concerning matters covered by the attorney’s response letter in a conference, which offers
a more detailed discussion and explanation than a written reply. That guidance notes that the auditor
should appropriately document conclusions reached concerning the accounting for a loss contingency.
In addition to performing follow up procedures with the outside attorney, the auditor would also
update all subsequent events procedures through the new date. That would include, among other
procedures, updating inquiries with management and reviewing recent board of directors’ minutes for
issues related to the financial statements under audit, including issues related to loss contingencies. The
letter of representation obtained from management should be dated as of the new audit completion
date.
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Indicate whether the statement is true or false
A company is considering spending the following on a new quality improvement program
Inspect raw materials $123,000 Reengineer to improve product quality 760,000 Inspect finished goods 150,000 Preventive maintenance of equipment 140,000 The company expects this quality program to reduce costs by the following amounts: Avoid lost profits due to unhappy customers $910,000 Fewer sales returns 65,000 Decrease the cost of rework 155,000 Lower warranty costs 54,000 Group each cost under the four categories of quality management systems. Comment whether the company should undertake the quality improvement program. What will be an ideal response