RRChapter17 - Completing the Audit Chapter 17 1 Summary of...

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Unformatted text preview: Completing the Audit Chapter 17 1 Summary of the Audit Process Plan and design Phase I an audit approach. Phase II Perform tests of controls and substantive tests of transactions. Perform analytical procedures and Phase III tests of details of balances. Phase IV Complete the audit and issue an audit report. 2 Phase IV – Completing the Audit Review for contingent liabilities Review for subsequent events Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management 3 Completion of Fieldwork Presentation and Disclosure Objectives Review miscellaneous revenues and expenses Obtaining lawyer’s letter – contingencies Obtaining client representation letter Final review and wrap­up Subsequent events 4 Presentation and Disclosure Audit Objectives (page 779) Occurrence and rights and obligations: Disclosed events and transactions have occurred and pertain to the entity. Completeness: All disclosures that should have been included in the financial statements have been included. 5 Presentation and Disclosure Audit Objectives (page 779) Classification and understandability: Financial information is appropriately presented and described and disclosures are clearly expressed. Accuracy and valuation: Financial and other information are disclosed fairly and at appropriate amounts. 6 Procedures for Revenue and Expense Significant accounts have been audited as part of the cycle procedures Analytical Procedures are performed as a review for: – Unusual or large transactions – Compared to prior year(s) for material changes Clearing accounts are reviewed for hanging or unrecorded issues 7 Contingent Liabilities A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. 8 Likelihood of Occurrence and Financial Statement Treatment Likelihood of Financial Statement Occurrence of Event Treatment Remote (slight chance) No disclosure necessary Reasonably possible Footnote disclosure Probable Adjust financial statements OR footnote disclosure 9 Auditor’s Concerns • Pending litigation for patent infringement, product liability, or other actions • Income tax disputes • Product warranties • Notes receivable discounted • Guarantees of obligations of others • Unused balances of outstanding letters of credit 10 10 Audit Procedures for Finding Contingencies Inquire of management (orally and in writing) about the possibility of unrecorded contingencies. Review current and previous years’ internal revenue reports for income tax settlements. Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits. 11 11 Audit Procedures for Finding Contingencies Analyze legal expenses and review invoices and statements from legal counsel. Obtain a letter from each major attorney of the client as to the status of pending litigation. Review audit documentation for any information that may indicate a potential contingency. Examine letters of credit in force. 12 12 Attorney’s Letter Sent by auditor to lawyer Asks about contingencies, litigations and claims identified by management Asks opinion on outcome ­ FASB 5 Ask if any other litigations exist Performed at end of fieldwork 13 13 Contingencies Inquire with management about Litigations, assessments and claims Obtain from management a list of these claims Examine internal documents for claims – Minutes, loan agreements, contracts, correspondence/invoices from lawyers – Guarantees from bank confirmations Obtain assurance from management that all claims are disclosed (even unasserted but likely claims) Send Attorney’s Letter 14 14 Inquiry of Client’s Attorneys Inquiry of Client’s Attorneys A list including (1) pending threatened litigation and (2) asserted or unasserted claims or assessments with which the attorney has had involvement. A request that the attorney furnish information or comment about the progress of each item listed. 15 15 Inquiry of Client’s Attorneys A request for the identification of any unlisted pending or threatened legal action or a statement that the client’s list is complete. A statement informing the attorney of the attorney’s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor. 16 16 Sarbanes­Oxley Act Congress included provisions in this act directing the SEC to issue rules requiring attorneys serving public companies to report material violations by the company of federal securities laws. The American Bar Association amended its attorney-client confidentiality rules to permit attorneys to breach confidentiality if a client is committing a crime or fraud. 17 17 Subsequent Events Event that happens after the balance sheet date but before the report is issued. May require adjustment to the F/S or disclosure. Procedures are required to be performed close to the end of fieldwork to uncover any possible subsequent events. 18 18 Period Covered by Subsequent Events Review Client’s ending balance sheet date Audit Date client report issues financial date statements 12-31-02 3-11-03 Period to which review for subsequent events applies 3-26-03 Period for processing the financial statements 19 19 Subsequent Events Found during field work or before report issued. Type 1 ­ conclusion of a contingency estimated on books, correct year end to actual amounts. Type 2 ­ New event happened after B/S date, disclose event and sometimes prepare pro forma F/S 20 20 Types of Subsequent Events Those that have a direct effect on the financial statements and require adjustment Those that have no direct effect on the financial statements but for which disclosure is advisable 21 21 Requiring Adjustment • Declaration of bankruptcy by a customer with an accounts receivable balance • Settlement of a litigation at an amount different from the amount recorded on the books 22 22 Requiring Adjustment • Disposal of equipment not being used in operations at a price below the current book value 23 23 Advisability of Disclosure • Decline in the market value of securities held for temporary investment or resale • Issuance of bonds or equity securities • Decline in the market value of inventory as consequence of government action barring further sale of a product • Uninsured loss of inventories as a result of fire • A merger or an acquisition 24 24 Audit Tests Inquiry of management Correspond with attorneys Review internal statements prepared subsequent to the balance sheet date Review records prepared subsequent to the balance sheet date Examine minutes issued subsequent to the balance sheet date Obtain a letter of representation 25 25 Dual Dating The first date is the date for the completion of field work except for a specific exception. The second date, which is always later, deals with the exception. 26 26 Final Evidence Accumulation 1. Perform final analytical procedures. 2. Evaluate the going-concern assumption. 3. Obtain a management representation letter. 4. Consider information accompanying the basic financial statements. 5. Read other information in the annual report 27 27 Management Representation Letter (SAS85) Puts in writing management’s verbal and implied assertions. Usually drafted by the auditor and signed by client’s officers From client to the auditor Done at end of field work 28 28 Management Representation Letter Includes: Management’s responsibility for fair presentation of F/S and belief that the F/S are fairly stated Access to all records, absence of unrecorded transactions Completeness and availability of all BOD minutes Identification of any fraud, related parties, encumbrances, and subsequent events 29 29 SOX – Management Representation Letter Requirements Disclosure of significant deficiencies Acknowledgement of responsibilities for internal control Disclosure of any knowledge of fraud or allegation of fraud 30 30 Information Accompanying Basic Financial Statements Balance sheet Income statement Statement of cash flows Footnotes Basic financial statements Standard auditor’s report 31 31 Information Accompanying Basic Financial Statements Detailed comparative statements Statistical data Schedule of insurance coverage Information accompanying basic financial statements Separate paragraph – unqualified, qualified, or disclaimer 32 32 Completing the Engagement Checklist YES NO . Examination of prior year’s audit documentation a. Were last year’s audit files examined for areas of emphasis in the current-year audit? ___ ___ b. Was the permanent file reviewed for items that affect the current year? ___ ___ 33 33 Completing the Engagement Checklist YES NO . Internal control a. Has internal control been adequately understood? ___ ___ b. Is the scope of the audit adequate in light of the assessed control risk? ___ ___ c. Have all major weaknesses been included as reportable conditions in a letter to the audit committee or to senior management? ___ ___ 34 34 Completing the Engagement Checklist YES NO . General documents a. Where all current-year minutes and resolutions reviewed, abstracted, and followed up? ___ ___ b. Has the permanent file been updated? ___ ___ c. Have all major contracts and agreements been reviewed and abstracted and copied with all existing legal requirements? ___ ___ 35 35 Wrap up Work papers are reviewed, ticked and tied Analytical procedures performed To do list missing items Second Partner review for quality Adjustments are proposed by the auditor Approved by the client F/S and notes drafted by auditor 36 36 Evaluate Results Sufficient appropriate evidence Evidence supports auditor’s opinion Financial statement disclosures Audit documentation review Independent review Summary of evidence evaluation 37 37 Issue the Audit Report The audit report is the only thing that most users see in the audit process and the consequences of issuing an inappropriate report can be severe. 38 38 Communicate with the Audit Committee and Management Communicate fraud and illegal acts Communicate reportable conditions Other communication with audit committee Management letters 39 39 Other Communications SAS 61 Auditor’s responsibilities to follow GAAS Significant Accounting Policies Significant Adjustments to F/S Auditor’s judgment on quality of GAAP Disagreements with management, difficulties in performing audit SOX – All critical accounting policies and practices – Alternative treatments of GAAP discussed with management – Other material communications with management, management letter, schedule of adjustments 40 40 Management Letter Letter from auditor to client Suggestions to client to improve business Done after audit Follow up/ value added service Consulting services opportunity 41 41 Problems found after audit report issued Subsequent discovery of fact – Events that occurred prior to the report date – Discovered after the report is issued. Auditor omitted procedures – Missing required GAAS – Discovered after report issued 42 42 Period Covered by Subsequent Events Review Client’s ending balance sheet date 12-31-02 Audit report date Date client issues financial statements 3-11-03 3-26-03 Period to which Period for review for processing subsequent the financial events applies statements Period in which subsequent discovery of facts is made 43 43 Subsequent Discovery of Fact Not required to keep looking for subsequent events after the report. If one is found and the facts existed on the report date – the auditor needs to withdraw old report and issue new. – If the client will not allow this, the auditor must inform those relying on the old report not to anymore. 44 44 Omitted procedures found after the audit report Found during peer reviews ­ missing procedures Determine if procedure is important to opinion or if other procedures proved balance. If important, is report still being relied on? No Ok such as old report. If yes, perform procedure or alternate procedure, If can’t do alternate procedure ­ get legal council. Does evidence change opinion ­ if no your fine If yes, withdraw old report and issue new. 45 45 End of Chapter 24 46 46 ...
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