Reference no: EM133170276

Question -

1. Describe the auditor's process for preparing, sending, and receiving responses from legal letters, including at what point during the audit the letters are sent.

2. Provide an example of why an auditor would reevaluate control risk near the end of the audit. Provide a different example of why an auditor would reevaluate fraud risk near the end of the audit.

3. AU-C 260 stresses the importance of communication with "those charged with governance." Who are "those charged with governance?" Discuss why it is important that the auditor communicate with them (and not others).

4. Discuss the items an auditor communicates at the end of the audit to those charged with governance.

5. Brad Scarlett is reviewing the results of the subsequent events audit procedures. Brad is writing a report for the audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the financial statements should be amended or additional notes included for these subsequent events.

Many of the items are not material and Brad will recommend that no action be taken with respect to these. However, there are several items that Brad believes are material and should be discussed at the meeting. These are:

The board is planning to issue shares in a private offering on February 15.

The share issue is to fund the purchase of a 60% stake in another company. The negotiations are in the final stages and although the contract is not yet signed, it will be signed by February 15.

A lawsuit was filed in court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company's manufacturing plant in the 2000s. This is the tenth such lawsuit filed and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defense.

The review of subsequent cash receipts has revealed that several of the receivables that were considered doubtful have now been paid. The year-end for the company is December 31 and the audit report is due to be signed on February 20.

For each item, discuss what type of subsequent event it is and the appropriate treatment in the financial statements.

The year-end for the company is December 31 and the audit report is due to be signed on February 20.

For each item, discuss what type of subsequent event it is and the appropriate treatment in the financial statements.

6. Mark Jackson is the partner on the audit team for a new client, Central Companies (CC). The client hired Mark's firm in August 2022, in preparation for the December 31, 2022, audit. Mark's firm is replacing the predecessor firm that audited CC for the last 12 years. Since January 2022, CC has experienced a slowdown in sales as evidenced by lower inventory turnover ratios. Slower inventory turnover has negatively impacted operating cash flow, which has resulted in CC paying some of its suppliers late. Some of the smaller suppliers are demanding that CC pay cash on delivery of inventory items. Mark is also aware of correspondence between CC and its bank that indicates the company started having cash flow problems as far back as 2021. CC's management is convinced that business will pick up and therefore has not laid off any employees or made any other strategic changes to try and improve cash flow.

Discuss any significant events or conditions that Mark will consider when evaluating if there is substantial doubt about CC's ability to continue as a going concern.