Hello, Please help me with my homework! I really don\'t understand it and would

Question

Hello, Please help me with my homework! I really don't understand it and would like good answers for the following. It is one question with a few sections. I am studying for finals, so please make sure they are correct! Thank you in advance!

a. Should an auditor send an accounts payable confirmation letter to a client's vendor to whom the client owes nothing? Why or why not?

b. At what point(s) during an audit must analytical review be done and why should it be done then?

c. under what circumstances should contingencies (e.g. possible lawsuit) be disclosed in the notes to the financial statements but not booked?

d. Under what circumstances can contingencies be ignored and not disclosed at all?

e. How should an audit client handle each of the following subsequent events (which occured after the balance sheet date but before the financial statements were issued?)

I. the client sells a significant volume of bonds

II. a breakdown occurs in labor negotiations and the client is faced with the strong chance of an employee strike.

III. The client receives confirmation of the bankruptcy of a customer who owed $100,000, net of allowance, on the balace sheet.

Thank you so much in advance!! I will rate!

Explanation / Answer

a.Yes. Confimation is a process of obtaining a direct communication from third party in reponse to a request for information about an item affecting finanicial statements assertions. Even , if the balance outstanding shows zero in the books, the auditor must send the confirmation request to cross check with the vendors balance in their books. There may be a case if some of the transactions can be recorder from the vendor's end and not the clients end. Hence, it is better to send a confirmation request to the active vendors irrespective of the amount. This ensures the liabilities are not understated in case of non recording of purchases or over stated in case any advance payment has been made from the client.

B. Analytical review : Analytical procedures (AP) are evaluation of the financial information made by a study of plausible relationships among financials and non financial data . AP should be applied in planning all the financial statements audits for risk assessment to assist the auditor in determining the nature, timing and extent of other audit procedures. They are commonly used as substantive tests. Eg : Comparative figures analysis, Aniticipated results , ratio analysis, industry standards, some other related non financial information like number of hours worked and efficiency.

C. A contingent liability ( Eg : lawsuit ) should be recorded in the financial statements when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If that is not possible then a company should put a disclosure about the liability in the notes to the financial statements.

D. A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.Contingent assets should not be recognised – but should be disclosed where an inflow of economic benefits is probable. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

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