2011 McGraw-Hill/Irwin
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 11 Completing the Audit
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
Describe the approach used to examine major revenue and expense
accounts.
Identify procedures performed by auditors to evaluate contingencies,
including the use of an attorney letter, during the completion of the audit.
Explain why auditors obtain management representations and identify the
key components of management representations.
Identify the two major categories of subsequent events and describe the
proper handling of these events by auditors.
Identify the final steps in the completion of an audit.
Following the audit report release date, identify auditors responsibilities
for (1) facts that may have existed at the date of the auditors reports and
(2) omitted audit procedures.
Summarize important communications made by auditors following
completion of the audit and audit report release date.
11-2
Considerations in Completing the
Audit
Roll-forward work
Revenue and expense
accounts
Attorney letters
Management
representations
Subsequent events
Going-concern assessment
Adjusting journal entries
Audit documentation
review
Subsequent discovery of
facts
Omitted audit procedures
Management letter
Communications with
those charged with
governance
11-3
Major Activities in Audit
Beginning
of year
Interim testing
(tests of controls
and substantive
procedures)
End
of year
Audit completion date
(Audit report date)
Roll-forward work
Subsequent events
Revenue and expenses
(dual dating)
Attorney letters
Management representations
Subsequent events
Going-concern assessment
Adjusting entries
Audit documentation review
Audit report
release date
Subsequent discovery of facts
Omitted audit procedures
Management letter
Communications with those
charged with governance
11-4
Revenue and Expense
Accounts
Substantive procedures for related balance
sheet accounts
Analytical procedures
Scan accounts for large and unusual entries
Be aware of miscellaneous, other, and
clearing accounts
May provide evidence of earnings
management
11-5
Attorney Letters: Responsibilities
Auditors
Initiate request for attorney letter
Client
Prepare listing, description, and evaluation of
litigation, claims, and assessments for letter
Send letter to attorney including information related
to litigation, claims, and assessments
Attorney
Respond to auditors regarding clients description of
litigation, claims, and assessments contained in
attorney letter
11-6
Procedures for Litigation,
Claims, and Assessments
Inquiry of clients
Review minutes of meetings of stockholders,
directors, and committees
Review contracts, loan agreements, and
correspondence from taxing and governmental
agencies
Obtain information concerning guarantees from
bank confirmations
Review documentation related to legal services
11-7
Management Representations
Provided by management to auditors
Dated using audit completion date
Broad purpose
Impress upon management its primary responsibility for the financial statements
May establish auditors defense if a question related to inquiries subsequently arises
Qualify or disclaim an opinion if not provided by the client
Required without regard to materiality:
Management responsibility for the fairness of the financial statements
Availability all of financial records and data
Management responsibility for design and implementation of programs and
controls related to fraud
Disclosure of significant deficiencies in internal control
Information concerning fraud involving the client
11-8
Representations Related to I/C
If subject to requirements of AS 5
Management has performed as assessment of
I/C
Managements conclusion with respect to the
operating effectiveness of its I/C
No subsequent changes in I/C that significantly
affect I/C
No control deficiencies from prior engagements
have not been properly resolved
11-9
Subsequent Period
Beginning
of year
End of
year
Audit
completion
date
Audit report
release
date
Subsequent
Period
Audit Procedures
Auditors perform procedures to evaluate events that may affect
presentation and disclosure in the financial statements
Events occurring during this period are known as subsequent events
11-10
Procedures in Subsequent
Period
Review latest interim financial statements
Inquire of officers and other executives
Read minutes of meetings of shareholders,
directors, and committees
Obtain responses to attorney letters
Obtain management representations
11-11
Subsequent Events
Type I
Provide new information about conditions existing at
balance sheet date
Adjust financial statements to reflect new information
Type II
Involve events occurring after balance sheet date
Disclose in financial statements
Prepare pro forma financial statements
11-12
Adjusting Journal Entries
Accumulate proposed entries for identified misstatements on score
sheet
Evaluate materiality
Rollover method considers the current period income effect(s) of
misstatements
Iron curtain method considers the aggregate effect of the adjustments on
the entitys balance sheet
SAB 108 requires adjustments to be proposed if material under either
approach
Recommend adjustment of all misstatements identified
Carry any uncorrected misstatements forward for consideration in
future audits
Communicate all adjustments and misstatements to audit committee or
individuals charged with governance
11-13
Subsequent Discovery of
Facts
Require disclosure of events if:
Facts are reliable and existed at report date
Facts affect financial statements and auditors reports
Persons are continuing to rely on financial statements
and auditors reports
If client refuses disclosure, auditors should inform
board that he or she will notify regulatory agencies
and others relying on the reports
11-14
Communication with Individuals
Charged with Governance
Auditors responsibility under
GAAS
Overview of planned scope and
timing of audit
Judgment about quality of
accounting policies, estimates,
and disclosures
Significant difficulties
encountered during audit
Uncorrected misstatements
Disagreements with
management
Material, uncorrected
misstatements
Representations requested from
management
Management consultations with
other auditors
Significant issues discussed
with management
Other findings or issues
significant and relevant to those
charged with governance
11-15
Management Letters
Not required under GAAS
Are prepared as a by-product of procedures
performed in audit
Provide recommendations to client for
improving effectiveness and efficiency of
operations
Delivered by auditors to client following
audit engagement
11-16