1. Are analytical procedures requiredas part of the final overall review ofthe financial statements? What is thepurpose of such analyticalprocedures?

Auditing standards (AU 520, PCAOB AS No. 14), require that the auditor perform analyticalprocedures at the final review stage of the audit. The objective of conducting final analyticalprocedures near the end of the engagement is to help the auditor assess the conclusionsreached on the financial statement components and evaluate the overall financial statementpresentation.

2. List the three overall steps in thegoing-concern evaluation process.

Three overall steps in the going concern evaluation process are as follows:1. Consider whether the results of audit procedures performed during the planning,performance, and completion of the audit indicate whether there is substantial doubt about theentity's ability to continue as a going concern for a reasonable period of time not to exceed oneyear.2. If there is substantial doubt, the auditor should obtain information about management'splans to mitigate the going concern problem and assess the likelihood that such plans can beimplemented.3. If the auditor concludes, after evaluating management's plans, that there is substantialdoubt about the ability of the entity to continue as a going concern, he or she should considerthe adequacy of the disclosures about the entity's ability to continue and include anexplanatory paragraph in the audit report.

3. Provide two examples ofcommitments. Under whatconditions may such commitmensresult in the recognition of a loss inthe financial statements.

Two examples of long-term commitments are the purchase of raw materials or the sale ofproducts at a fixed price. When the fair market value of the good is less than the purchaseprice included in the purchase contract, the entity will have to recognize a loss on a long-termcommitment even though there has been no exchange of goods.

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4. What are the twotypes of subsequentevents relevant tothe financialstatement audit?

The two types of subsequent events that require consideration by management and evaluation by the auditorrelevant to financial statement audits areType I Events that provide additional evidence about conditions that existed at the date of the balance sheet andaffect the estimates that are part of the financial statement preparation process. These types of events requireadjustment of the financial statements. Type II Events that provide evidence about conditions that did not exist at the date of the balance sheet but arosesubsequent to that date. These types of events usually require disclosure in the notes to the financial statements.In some instances, where the effect of the event or transaction is very significant, pro forma financial statementsmay be necessary in order to prevent the financial statements from being misleading.Examples of Type I events or conditions are• An uncollectible account receivable resulting from continued deterioration of a customer's financial conditionleading to bankruptcy after the balance sheet date.• The settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in theyear-end financial statements.

Examples of Type II events or conditions are• Purchase or disposal of a business by the entity.• Sale of a capital stock or bond issue by the entity.• Loss of the entity's manufacturing facility or assets resulting from a casualty such as a fire or flood.• Losses on receivables arising from conditions such as a casualty arising subsequent to the balance sheet date.

The two types of subsequent events that require consideration by management and evaluation by the auditorrelevant to the audit of internal control over financial reporting are1. Control events that reveal information about a material weakness that existed as of the end of the reportingperiod. If the event reveals information about a material weakness, the auditor should issue an adverse opinionregarding the effectiveness of internal control over financial reporting. If the auditor is unable to determine theeffect of the subsequent control event on the effectiveness of the company's internal control, the auditor shoulddisclaim an opinion.

2. Control events that create or reveal information about a new condition that did not exist as of the end of thereporting period. If the information has a material effect on the company, the auditor should include anexplanatory paragraph describing the event and its effects or directing the reader's attention to the event and itseffects as disclosed in management's report.

Examples of the control events or conditions (relating to both before and after the reporting period) are• Relevant internal audit reports (or similar functions, such as loan review in a financial institution) issuedduring the subsequent period.• Independent auditor reports (if other than the primary auditor's) of significant deficiencies or materialweakness.• Regulatory agency reports on the company's internal control over financial reporting.• Information about the effectiveness of the company's internal control over financial reporting obtained throughother engagements.

5. What information doesthe auditor ask the lawyerto provide on pending orthreatened litigation?

The auditor requests that the attorney provide the following information on pending or threatenedlitigation:• A list and evaluation of any pending or threatened litigation to which the attorney has devotedsubstantial attention. The client may provide the list.• A listing of unasserted claims and assessments considered by management to be probable of assertionand reasonably possible of unfavorable outcome.• A description and evaluation of the outcome of each pending or threatened litigation. This should includethe progress of the case, the action the entity plans to take, the likelihood of unfavorable outcome, and theamount or range of potential loss.• Additions to the list provided by management or a statement that the list is complete.• Comments on unasserted claims where his or her views differ from management's evaluation.• A statement by management acknowledging an understanding of the attorney's professionalresponsibility involving unasserted claims and assessments.• Indication if his or her response is limited and the reasons for such limitations.• A description of any materiality levels agreed upon for the purposes of the inquiry and response.

An unasserted claim or assessment is one in which the injured party or potential claimant has not yetnotified the entity of a possible claim or assessment. Attorneys may be reluctant to provide the auditor withinformation about the unasserted claims because of client-attorney privilege. Attorneys may also beconcerned that disclosure of the unasserted claim may itself result in lawsuits.

6. what is meant by acontingency? Giveexamples.

A contingent liability is defined as an existing condition, situation, or set of circumstances involvinguncertainty as to possible loss to an entity that ultimately will be resolved when some future event occurs orfails to occur. FASB ASC Topic 450, "Contingencies," classifies uncertainties into three categories:1. Probable: The future event is likely to occur.2. Reasonably possible: The chance of the future event occurring is more than remote but less than likely.3. Remote: The chance of the future event occurring is slight.Examples of contingent liabilities include• Pending or threatened litigation• Actual or possible claims and assessments• Income tax disputes• Product warranties or defects• Guarantees of obligations to others• Agreements to repurchase receivables that have been sold

7. What major categories ofevents of conditions mayindicate going-concernproblems?

The four major categories of events or conditions that may indicate going concern problems and examplesof each are

Financial conditions:• Recurring operating losses• Current-year deficit• Accumulated deficits• Negative net worth• Negative working capital• Negative cash flow• Negative income from operations• Inability to meet interest payments

Other financial difficulties:• Default on loans• Dividends in arrears• Restructuring of debt• Denial of trade credit by suppliers• No additional sources of financing

Internal matters:• Work stoppages• Uneconomic long-term commitments• Dependence on the success of one particular project

External matters:• Legal proceedings• Loss of a major customer or supplier• Loss of a key franchise, license, or patent

8. Why does the auditorobtain a representationletter from management?

The auditor obtains a representation letter in order to corroborate oral representations made to the auditorand to document the continued appropriateness of such representations. The representation letter alsoreduces the possibility of misunderstanding concerning the responses provided by management to theauditor's inquiries.