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CPAR AT - Completing The Audit
CPAR AT - Completing The Audit
Manila
The following procedures may identify material transactions with known related parties or
indicate the existence of previously unknown related parties:
1. Provide personnel performing all segments of the audit with the names of known related
parties.
2. Review the minutes of meetings of the board of directors and committees.
3. Review filings with the SEC and other regulatory agencies.
4. Review conflict-of-interest statements obtained from the client’s management.
5. Review business transacted with major customers, suppliers, borrowers, and lenders for
indications of undisclosed relationships.
6. Consider whether unrecognized transactions are occurring, such as receiving or providing
accounting, management, or other services at no charge.
7. Review accounting records for large, unusual, or nonrecurring transactions or balances,
especially those near the end of the period.
8. Review invoices from law firms.
9. Review confirmations of loans receivable and payable for guarantees.
After identifying related party transactions, the auditor should become satisfied about their
purpose, nature, extent, and effect. The following should be considered:
representative related party transactions by the auditor for each of the parties, with
appropriate exchange of relevant information.
6. Inspect or confirm and obtain satisfaction concerning the transferability and value of
collateral.
1. Events after the balance sheet date are those events, both favorable and unfavorable, that
occur between the balance sheet date and the date when the financial statements are
authorized for issue.
2. The following procedures are typically performed at or near the completion of fieldwork to
detect subsequent events:
a. Read the latest available interim financial statements and compare them with the
financial statements being reported on.
b. Read the available minutes of meetings of stockholders, directors, and appropriate
committees.
c. Assemble pertinent findings resulting from inquiries of legal counsel and other auditing
procedures for litigation, claims, and assessments.
d. Obtain a letter of representation from management.
3. When the auditor becomes aware of events which materially affect the financial statements,
the auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements.
1. The auditor is required to communicate directly with a client’s attorney about liabilities
arising from litigation, claims, and assessments.
2. A list of legal issues should be prepared by the client’s management, rather than the client’s
attorney. This information is sent by the auditor to the attorney, requesting information
about:
a. pending or threatened litigation, claims, and assessments, and
b. unasserted claims and assessments
3. The client should request the attorney to furnish the following information for all pending or
threatened litigation, claims, and assessments, and to comment on differences between the
attorney’s and management’s views:
a. A description of the nature of the matter, progress to date, and action the client intends
to take.
b. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can
be made, of the amount or range of potential loss.
c. A statement that management’s list of pending or threatened claims is complete, or
identification of any omissions.
4. The attorney’s refusal to reply to the audit inquiry is a SCOPE LIMITATION that may affect
the audit report.
5. In the case of unasserted claims which the client has not disclosed, the lawyer is not
required to note them in his or her reply to the auditor. However, the lawyer is generally
required to inform the client of the omission and to consider withdrawing if the client fails to
inform the auditor.
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3. Written representations requested from management may be limited to matters that are
considered either individually or collectively material to the financial statements.
(Entity Letterhead)
(To Auditor) (Date)
This representation letter is provided in connection with your audit of the financial statements of ABC
Company for the year ended December 31, 20X1 for the purpose of expressing an opinion as to
whether the financial statements present fairly, in all material respects, the financial position of ABC
Company as of December 31, 20X1 and of the results of its operations and its cash flows for the year
then ended in accordance with (indicate relevant financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance
with (indicate relevant financial reporting framework).
We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
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• The Company has satisfactory title to all assets and there are no liens or encumbrances on
the Company’s assets, except for those that are disclosed in Note X to the financial
statements.
• We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent,
and have disclosed in Note X to the financial statements all guarantees that we have given
to third parties.
• Other than . . . described in Note X to the financial statements, there have been no events
subsequent to period end which require adjustment of or disclosure in the financial
statements or Notes thereto.
• The . . . claim by XYZ Company has been settled for the total sum of XXX which has been
properly accrued in the financial statements. No other claims in connection with litigation
have been or are expected to be received.
• There are no formal or informal compensating balance arrangements with any of our cash
and investment accounts. Except as disclosed in Note X to the financial statements, we
have no other line of credit arrangements.
• We have properly recorded or disclosed in the financial statements the capital stock
repurchase options and agreements, and capital stock reserved for options, warrants,
conversions and other requirements.
______________________________
(Senior Executive Officer)
______________________________
(Senior Financial Officer)
1. The auditor should evaluate management’s assessment of the entity’s ability to continue as
a going concern.
3. When events or conditions have been identified which may cast significant doubt on the
entity’s ability to continue as a going concern, the auditor should:
• review management’s plans for future actions based on its going concern
assessment;
• gather sufficient appropriate audit evidence to confirm or dispel whether or not a
material uncertainty exists through carrying out procedures considered necessary,
including considering the effect of any plans of management and other mitigating
factors; and
• seek written representations from management regarding its plans for future action.
FINANCIAL
• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment;
or excessive reliance on short-term borrowings to finance long-term assets.
• Indications of withdrawal of financial support by debtors and other creditors.
• Negative operating cash flows indicated by historical or prospective financial statements.
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the value of assets used to generate
cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
• Inability to comply with terms of loan agreements.
• Change from credit to cash-on-delivery transactions with suppliers.
• Inability to obtain financing for essential new product development or other essential
investments.
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OPERATING
• Loss of key management personnel without replacement.
• Loss of a major market, franchise, license, or principal supplier.
• Labor difficulties or shortages of important supplies.
OTHER
• Non-compliance with capital or other statutory requirements.
• Pending legal or regulatory proceedings against the entity that may, if successful, result in claims
that are unlikely to be satisfied.
• Changes in legislation or government policy expected to adversely affect the entity.
2. A management letter is OPTIONAL and is intended to help the client operate its business
more effectively.
3. There is no standard format or approach for writing management letters. The management
letter should be developed to meet the style of the auditor and the needs of the client.
1. Analytical procedures used in the overall review stage of the audit generally include
A. Retesting controls that appeared to be ineffective during the assessment of control
risk.
B. Considering unusual or unexpected account balances that were not previously
identified.
C. Gathering evidence concerning account balances that have not changed from the prior
year.
D. Performing tests of transactions to corroborate management’s financial statement
assertions.
2. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most
likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.
3. The responsibility for the identification and disclosure of related parties and transactions
with such parties rests with the
A. Auditor.
B. Entity’s management.
C. Financial Reporting Standards Council (FRSC).
D. Securities and Exchange Commission (SEC).
4. The auditor should review information provided by those charged with governance and
management identifying
I. The names of all known related parties.
II. Related party transactions.
A. I only. C. Both I and II.
B. II only. D. Neither I nor II.
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5. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms for repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.
6. An auditor searching for related party transactions should obtain an understanding of each
subsidiary’s relationship to the total entity because
A. This may permit the audit of intercompany account balances to be performed as of
concurrent dates.
B. This may reveal whether particular transactions would have taken place if the parties
had not been related.
C. The business structure may be deliberately designed to obscure related party
transactions.
D. Intercompany transactions may have been consummated on terms equivalent to
arm’s-length transactions.
7. After determining that a related party transaction has, in fact, occurred, an auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to an arm’s-
length transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions occurred, but were
not recorded.
8. As used in PSA 560 (Subsequent Events), the term “subsequent events” refers to
I. Events occurring between the date of the financial statements and the date of the
auditor’s report.
II. Facts discovered after the date of the auditor’s report.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
9. Which of the following statements best describes the “date of the financial statements?”
A. The date on which those with the recognized authority assert that they have prepared
the entity’s complete set of financial statements, including the related notes, and that
they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are made available
to third parties.
C. The date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent balance sheet in the financial statements subject
to audit.
D. The date on which the auditor has obtained sufficient appropriate audit evidence on
which to base the opinion on the financial statements.
10. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of the
financial statements.
B. Confirming a sample of material accounts receivable established after the date of the
financial statements.
C. Comparing the financial statements being reported on with those of the prior period.
D. Investigating personnel changes in the accounting department occurring after the date
of the financial statements.
11. Which of the following statements best expresses the auditor’s responsibility with respect
to facts discovered after the date of the auditor’s report but before the date the financial
statements are issued?
A. The auditor should amend the financial statements.
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B. If the facts discovered will materially affect the financial statements, the auditor
should issue a new report which contains either a qualified opinion or an adverse
opinion.
C. The auditor should consider whether the financial statements need amendment,
discuss the matter with management, and consider taking actions appropriate in the
circumstances.
D. The auditor should withdraw from the engagement.
12. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless
A. Final determinations or resolutions are made of contingencies that had been disclosed
in the financial statements.
B. Information about an event that occurred after the date of the auditor’s report comes
to the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
13. Which of the following events occurring after the issuance of an auditor’s report most
likely would cause the auditor to make further inquiries about the previously issued
financial statements?
A. A technological development that could affect the entity’s future ability to continue as
a going concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated
sales.
C. The discovery of information regarding a contingency that existed before the financial
statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial statements.
14. PSA 570 (Going Concern) states that a fundamental principle in the preparation of
financial statements is the going concern assumption. Under this assumption, an entity is
ordinarily viewed as continuing in business for the foreseeable future with neither the
intention nor the necessity of liquidation, ceasing trading or seeking protection from
creditors pursuant to laws and regulations. The responsibility to make an assessment of
an entity’s ability to continue as a going concern rests with the
A. Auditor
B. Entity’s management
C. SEC
D. Entity’s creditors
15. Which of the following statements best describes the auditor’s responsibility concerning
the appropriateness of the going concern assumption in the preparation of the financial
statements?
A. The auditor’s responsibility is to make a specific assessment of the entity’s ability to
continue as a going concern.
B. The auditor’s responsibility is to predict future events or conditions that may cause the
entity to cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of management’s use of
the going concern assumption and consider whether there are material uncertainties
about the entity’s ability to continue as a going concern that need to be disclosed in
the financial statements.
D. The auditor’s responsibility is to give a guarantee in the audit report that the entity
has the ability to continue as a going concern.
16. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Cash flows from operating activities are negative.
B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.
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17. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
18. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity’s
ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.
19. Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to
continue as a going concern for a reasonable period of time. In evaluating Jersamtan’s
plans for dealing with the adverse effects of future conditions and events, Harold most
likely would consider, as a mitigating factor, Jersamtan’s plans to
A. Postpone expenditures for research and development projects.
B. Purchase production facilities currently being leased from a related party.
C. Strengthen internal controls over cash disbursements.
D. Discuss with lenders the terms of all debt and loan agreements.
20. When an auditor concludes that there is substantial doubt about a continuing audit client’s
ability to continue as a going concern for a reasonable period of time, the auditor’s
responsibility is to
A. Consider the adequacy of disclosure about the client’s possible inability to continue as
a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible
effects on the financial statements.
C. Report to the client’s audit committee that management’s accounting estimates may
need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that
specifically refers to “substantial doubt” and “going concern.”
22. When an audit is made in accordance with generally accepted auditing standards, the
auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence about specific
assertions related to account balances.
D. Document the understanding of the client’s internal control and the basis for all
conclusions about the assessed level of control risk for financial statement assertions.
23. When considering the use of management’s written representations as audit evidence
about the completeness assertion, an auditor should understand that such representations
A. Constitute sufficient appropriate audit evidence to support the assertion when
considered in combination with a sufficiently low assessed level of control risk.
B. Are not part of the audit evidence considered to support the assertion.
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C. Replace a low assessed level of control risk as audit evidence to support the assertion.
D. Complement, but do not replace, substantive tests designed to support the assertion.
24. A written representation from a client’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should
normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the client’s lawyer.
D. Chair of the audit committee of the board of directors.
25. The date of the management representation letter should coincide with the date of the
A. Balance sheet
B. Latest related party transaction
C. Auditor’s report
D. Latest interim financial information
27. What type of opinion should be expressed if the client’s management refuses to provide a
representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.
28. The primary source of information to be reported about litigation, claims, and assessments
is the
A. Independent auditor
B. Client’s management
C. Court records
D. Client’s lawyer
29. The primary reason an auditor requests that letters of inquiry be sent to a client’s
attorneys is to provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.
B. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
C. Corroboration of the information furnished by management about litigation, claims,
and assessments.
D. The probable outcome of asserted claims and pending or threatened litigation.
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31. The refusal of a client’s lawyer to provide a representation on the legality of a particular
act committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a “subject to” opinion.
32. Management’s refusal to give the auditor permission to communicate with the entity’s
legal counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unmodified opinion.
D. A qualified opinion or a disclaimer of opinion.
33. In which of the following circumstances would an auditor most likely meet with the client’s
legal counsel to discuss the likely outcome of the litigation and claims?
I. The auditor determines that the matter is a significant risk.
II. There is a disagreement between management and the entity’s legal counsel.
III. The subject matter of the litigation is complex.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.
34. Which of the following statements extracted from a client’s lawyer’s letter concerning
litigation, claims, and assessments most likely would cause the auditor to request
clarification?
A. “I believe that the action can be settled for less than the damages claimed.”
B. “I believe that the company will be able to defend this action successfully.”
C. “I believe that the plaintiff’s case against the company is without merit.”
D. “I believe that the possible liability to the company is nominal in amount.”
35. The auditor should consider the status of legal matters up to the
A. Balance sheet date.
B. Date of the auditor’s report.
C. Date of approval of the financial statements.
D. Date of issuance of the financial statements.
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