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Unformatted text preview: Completing the Audit
Chapter 17 1 Summary of the
Plan and design
an audit approach. Phase II Perform tests of
of transactions. Perform analytical
tests of details
of balances. Phase IV Complete the
audit and issue
an audit report.
2 Phase IV –
Completing the Audit
final evidence Evaluate results Issue audit report
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.
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
Occurrence of Event
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 Audit Procedures for
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 Audit Procedures for
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 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 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 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 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 Period Covered by
Subsequent Events Review
report issues financial
statements 12-31-02 3-11-03 Period to which
events applies 3-26-03 Period for
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 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
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 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 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 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 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
31 Information Accompanying Basic Financial Statements
32 Completing the
. Examination of prior year’s audit
a. Were last year’s audit files examined
for areas of emphasis in the
b. Was the permanent file reviewed for
items that affect the current year?
33 Completing the
. Internal control
a. Has internal control been adequately
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
34 Completing the
. 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 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 Evaluate Results Sufficient appropriate evidence Evidence supports auditor’s opinion Financial statement disclosures
Audit documentation 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
– 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
date 12-31-02 Audit
date Date client
statements 3-11-03 3-26-03 Period to which Period for
statements Period in which
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 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 End of Chapter 24 46
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- Spring '12