Accounts: Auditor Report, Contingent Liabilities, Review Service Engagements

This document provides answers to various requirements related to accounts, including auditor report, contingent liabilities, and review service engagements. It discusses the information not required in an auditor report, deficiencies in auditor reports, differences between contingent liabilities and commitments, procedures for uncovering contingent liabilities, and the responsibilities of accountants in review service engagements.

Running head: ACCOUNTS
Accounts
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to requirement 1:...........................................................................................................3
Answer to requirement 2:...........................................................................................................4
Answer to requirement 3:...........................................................................................................5
Answer to requirement 4:...........................................................................................................7
Answer to requirement 5:...........................................................................................................9
References list:.........................................................................................................................11
Bibliography:............................................................................................................................13

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Answer to requirement 1:
a) Some of the information’s that are not required to be part of auditor report are as
follows:
 It is not necessary for auditors to mention about the presentation of comparative
financial statement. The information about presentation of comparative financial
statements is not required to be reported by the auditor in their audit report
(Aicpa.org, 2019).
 The change in the method of accounting for long term constructions need not be
included in the audit report. However, the footnote of change in the accounting
policies should be mentioned in the report.
 The inability of audit firm in performing the confirmation procedures of account
receivables should not be included in audit report. It is so because confirmation is
taken in order to obtain evidence from third parties.
b) Some of the deficiencies that were reported by the auditor in their report are listed
below:
 The exact date of conducting audit has not been disclosed in the report and the
balance sheet has not been stated at the end of year.
 No introductory explanation has been given about the roles and responsibilities of
management. In addition to this, no material misstatements have been reported in the
auditor report.
 The paragraph of opinion presented is in relation with the previous year and the
application of generally accepted auditing standards is not consistent (pcaobus.org,
2019).

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 Furthermore, a qualified opinion was issued by auditors about the disappointment on
cash flow statement.
 The statement of retained earnings and income statement has been audited that has
been prepared quarterly. In addition to this, the balance sheet has not been reported on
the year end for audit.
 Moreover, there is no independent disclosure about the scope of paragraph.
 Auditors have not provided any reasonable assurance that the transactions are
recorded which are necessary to permit the financial statement preparation and the
expenditure and receipts are being made according to the management authorization
(Hay, 2015).
Answer to requirement 2:
Some of the deficiencies that could be identified from the tentative report presented
by staff accountant are as follows:
 Although the auditor has examined the American broad band’s consolidated balance
sheet for the year ending December, 2010 and 2011. Therefore, introductory
paragraph mentioned about conducting audit of the financial statements of both the
years. However the opinion of the audit about the fair presentation of the financial
statements in accordance with the generally accepted principles of USA has been
expressed only for the year December 31, 2011. Moreover, there is no mentioning of
the word independent in the auditor’s report.
 There should be clear indication in the report about the introductory paragraph about
the portions of financial statement that have been audited separately when the auditor
is making reference to other auditor. However, the report does not mention any such
thing.

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 The sentence explaining the consistency is preceding the paragraph framing an
opinion about the financial statements. This should not be the case and the former
should follow the latter. Moreover, the opinion paragraph does not include the phrase
“all material aspects” which should be included.
 In event of principal auditor making reference to other auditor, there should be
appropriate disclosure about the percentage or the dollar amount of the financial
statements which the other auditor has audited. There was no mentioning about such
information in the report.
 Moreover, the opinion paragraph does not identify the statement of cash flow and the
paragraph does not refer to consolidated financial statements. Therefore, there is lack
of clarification on the financial statements that are audited as to whether the stand
alone or consolidated financial statements have been audited.
 The presentation of second paragraph is not appropriately done as the audit conducted
should provide detailed explanation about the examination, evidence supporting it is
disclosed in the financial statements (Soh et al., 2015).
Answer to requirement 3:
a) Difference between contingent liabilities and commitment are as follows:
Contingent liabilities Commitment
A contingent liability is the potential loss or
liability arising from the occurring or not
occurring of any particular events in future. It is
possible for the firm to estimate the amount when
contingent loss or liabilities are probable.
Commitment on other hand is considered an
fundamental part of budgetary control process
and expenditure planning which is essential to
ensure that the commitment control are in place.
Only if the liability amount can be estimated and
contingency is probable, then it is essential to
Commitments ensure than the funds are available
and they are recoded into the system for

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record contingency in the books of account. management and accountability.
Contingent liabilities are considered important in audit because auditors are required
to apply measurement, recognition and disclosure criteria for its determination. Moreover, the
carry certain risks which is easily dismissed and misunderstood and hence require setting
specific criteria for its assessment. Auditors are required to keep an eye on existence of any
contingent liabilities. On other hand, the evaluation of commitment of management forms an
important part of audit. For this purpose, auditors should take into account the effectiveness
of quality of the management system. Users of financial statements should be well acquainted
with the commitment and contingent liabilities as the material amount of resources are
represented during the course of period (Rezaee et al., 2015).
b) Auditors would be able to obtain various evidences about disclosure objectives
when testing the audit of notes payable. Whether the accounts payable are appropriately
included in the financial statements requires tracing of supporting documentation and general
ledger (Endaya & Hanefah, 2016). It would help in obtaining some assurance combination
for the ending balances and each class of transactions in related account. In addition to this,
performing of testing of notes payable provides thorough understanding assertions of
management in performing quality audits.
c) The three procedures for uncovering contingent liabilities even if Elizabeth does
not have responsibility for uncovering contingent liabilities are listed below:
 One approach would be review the minutes of meeting of shareholders and board of
directors along with making enquiries of management. For instance, if the auditors are
to uncover stock dividend declaration after the date of balance sheet, it can be done by

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discussing with the management or by reading the minutes of meeting subsequent to
the date of balance sheet.
 In relation to income tax settlement, reports of revenue agency should be reviewed.
Existence of any potential liabilities of the firm should be confirmed by auditor
(icaew.com, 2019).
 Any unused and used balance relating to line of credit should be confirmed.
Furthermore, assessment of additional tax can be uncovered by reviewing minutes and
examining the disbursement of cash.
d) As per the generally accepted accounting principles, it is required for organization
to make disclosure about the commitments and material contingencies. Identification of
undisclosed contingencies can be done three procedures listed below:
 The first approach that can be used by auditor is conducting an enquiry of the
management and its commitment and responsibility.
 Any legal expenses on part of organization to indicate contingent liabilities should be
analyzed properly.
 Any potential liabilities, status of litigation and confirming existence with the law
firms. Furthermore, auditor can obtain confirmation from all major firms to some
contingent liabilities or status of pending litigation and performing of any legal
service (Tepalagul & Lin, 2015).
Answer to requirement 4:
a) It is not acceptable on part of Little to wait till last day of field work for reviewing
the letters as he would not have sufficient time to make follow up about enquiring. Given the
scenario, only request regarding the letters should be sent to lawyers by Little who have
engagement in some legal issues that has direct impact on the financial statement. With

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respect to the assessment of letters, evidential matters should be obtained by auditors
considering the following facts.
 The period of occurrence of any legal action and its underlying cause.
 Any range or amount of potential loss that is incurred. In the given case, firm may
incur loss as one of the attorney letters has not been received.
 The degree of probability of occurrence of any unfavorable outcome should be
considered.
 Ascertaining that any circumstance, situation or condition exist which is indicative of
uncertainty. Such uncertainty might be occurrence of any possible loss arising from
claim, litigation and assessments (Simunic et al., 2015).
b) In such situation, Little is required to send only confirmation request to the firms
who have direct involvement in the legal matters that is affecting the financial statement
directly. Furthermore, sending of confirmation is to be done on reasonable basis when the
field work is on the verge of being completed. However, there should not be deterring of the
follow up on any unsatisfactory responses and non responses until the last day of completing
the field work. The letter should have been examined by Little at the very time of its
returning along with performing the follow up at that particular point of time. However, if
there was no information on part of auditor regarding the existence of letter then addressing
of the standard letter should have been done to the lawsuit itself (Anantharaman et al., 2016).
It is also required by auditor that on receiving first confirmation, there should be an
immediate follow up.
Regarding the third letter about the outstanding bill due from client and existence of
material lawsuit make it necessary to have a conference with the client, law firm and auditor.
It is so because it would help in determining significance and nature of lawsuit. Ignoring the

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information contained in the letter issued by law firm would be regarded as seriously
violating due care (mca.gov.in, 2019). However, if there is difficulty in obtaining the
information, it is considered necessary to have denial of opinion.
Answer to requirement 5:
a) The responsibility of accountants in performing review service engagements are
listed below:
 The adequacy and results of services performed should be evaluated by the
accountant.
 Accountant should accept the responsibility of the results that is generated from the
services performed.
 The ongoing activities should be monitored and they are also responsible for
maintaining and establishing internal controls.
 Accountant has the responsibility of performing accounting services by comparing
between account balances and records, supporting documents, account analysis and
subsidiary records that is essential based on the understanding of the industry and
business of client (Asare et al., 2015).
 In event of financial statements being submitted to client, accountant is required to
perform compilation procedures.
 Provide assistance to client personnel in drafting the footnotes and financial
statements and completing disclosure checklist.
b)

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 It is required by accountant to make recording of the repair cost in two ways. Such
cost can be either charging to a maintenance allowance account or accounting for
expenses when they are being incurred.
 In this scenario, it is required by the accountant to enquire about the accounting
policies and procedures for taxation. The tax liability of Murphy construction should
be reviewed. At the same time, the procedures followed in accounting for the taxes
should be asked from management.
 Accountant should review the internal control policies and the method used for
valuation of inventory and its ledger control accounts should be checked (Kassem &
Higson, 2016). The inventory burden of Murphy construction should also be checked.
 The balance of accounts receivables should be compared with documents such as
cheques obtained and cash received. Furthermore, it is necessary to review the
balance sheet and income statement of the organization.
 Accountant should send let of audit enquiry to the legal representative of the client
and with whom the management has consulted.

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References list:
Aicpa.org. (2019). Retrieved 23 February 2019, from
https://www.aicpa.org/content/dam/aicpa/research/standards/compilationreview/
downloadabledocuments/ar-c-00060.pdf
Anantharaman, D., Pittman, J. A., & Wans, N. (2016). State liability regimes within the
United States and auditor reporting. The Accounting Review, 91(6), 1545-1575.
Asare, S. K., Wright, A., & Zimbelman, M. F. (2015). Challenges facing auditors in detecting
financial statement fraud: Insights from fraud investigations. Journal of Forensic &
Investigative Accounting, 7(2), 63-112.
AU 337 Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments.
(2019). Pcaobus.org. Retrieved 23 February 2019, from
https://pcaobus.org/Standards/Auditing/Pages/AU337.aspx
Endaya, K. A., & Hanefah, M. M. (2016). Internal auditor characteristics, internal audit
effectiveness, and moderating effect of senior management. Journal of Economic and
Administrative Sciences, 32(2), 160-176.
Hay, D. (2015). The frontiers of auditing research. Meditari Accountancy Research, 23(2),
158-174.
Kassem, R., & Higson, A. W. (2016). External auditors and corporate corruption:
Implications for external audit regulators. Current Issues in Auditing, 10(1), P1-P10.
Mca.gov.in. (2019). Retrieved 23 February 2019, from
http://www.mca.gov.in/Ministry/notification/pdf/AS_4.pdf
Rezaee, Z., Abernathy, J., Causholli, M., Michas, P. N., Roush, P. B., Rowe, S., & Velury, U.
K. (2015). Comments of the Auditing Standards Committee of the Auditing Section
of the American Accounting Association on PCAOB Concept Release on Audit

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Quality Indicators, No. 2015-005, July 1, 2015: Participating Committee
Members. Current Issues in Auditing, 10(1), C11-C27.
Simunic, D. A., Ye, M., & Zhang, P. (2015). Audit Quality, Auditing Standards, and Legal
Regimes: Implications for International Auditing Standards. Journal of International
Accounting Research, 14(2), 221-234.
Soh, D. S., & Martinov-Bennie, N. (2015). Internal auditors’ perceptions of their role in
environmental, social and governance assurance and consulting. Managerial Auditing
Journal, 30(1), 80-111.
Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.
US GAAP. (2019). Icaew.com. Retrieved 23 February 2019, from
https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-
gaap

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Bibliography:
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A
systematic approach. McGraw-Hill Education.