Completing the audit

1. Completing the Audit
Chapter 24
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2. Learning Objective 1
Conduct a review for contingent
liabilities and commitments.
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3. Summary of the Audit Process
Phase I
Plan and design
an audit approach.
Phase II
Perform tests of controls
and substantive tests
of transactions.
Phase III
Perform analytical
procedures and tests
of details of balances.
Phase IV
Complete the
audit and issue
an audit report.
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4. 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.
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5. 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.
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6. Likelihood of Occurrence and
Financial Statement Treatment
Likelihood of
occurrence of event
Remote
(slight chance)
Reasonably
possible
Financial statement
treatment
No disclosure
necessary
Footnote disclosure
is necessary
Probable
(likely to occur)
Adjust financial statements
or footnote disclosure
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7. 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
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8. 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.
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9. 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.
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10. Learning Objective 2
Obtain and evaluate letters
from the client’s attorneys.
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11. 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.
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12. 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.
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13. Sarbanes-Oxley Act
Congress included provisions in this Act directing
the SEC to use 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.
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14. Learning Objective 3
Conduct a post-balance-sheet
review for subsequent events.
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15. Period Covered by
Subsequent Events Review
Client’s ending
balance sheet
date
12-31-04
Date client
issues financial
statements
3-26-05
Audit
report
date
3-11-05
Period to which
review for
subsequent
events applies
Period for
processing
the financial
statements
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16. Types of Subsequent Events
1
Those that have a direct effect
on the financial statements
and require adjustment
2
Those that have no direct effect on the
financial statements but for which
disclosure is advisable
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17. 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
 Disposal of equipment not being used in
operations at a price below the current book value
 Sale of investments at a price below recorded cost
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18. 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
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19. Audit Tests
 Inquire 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
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20. 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.
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21. Learning Objective 4
Design and perform the final steps
in the evidence-accumulation
segment of the audit.
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22. 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.
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23. Letter of Representation
1. Financial statements
2. Completeness of information
3. Recognition, measurement, and disclosure
4. Subsequent events
5. Matters related to reports on internal control
required by the Sarbanes-Oxley Act
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24. Letter of Representation:
Internal Control
1. Disclosure of all significant deficiencies
2. Management’s acknowledgment of its
responsibility to prevent and detect fraud
3. Knowledge of fraud or suspect fraud
4. Knowledge of any allegations of fraud
or suspected fraud
Auditors of public companies may
obtain a combined representation letter.
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25. Information Accompanying
Basic Financial Statements
Balance sheet
Income statement
Statement of
cash flows
Footnotes
Detailed comparative
statements
Statistical data
Schedule of
Basic
financial
statements
insurance coverage
Standard
auditor’s
report
Information
accompanying
basic financial
statements
Separate paragraph –
unqualified, qualified
or disclaimer
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26. Learning Objective 5
Integrate the audit evidence
gathered, and evaluate the
overall audit results.
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27. Evaluate Results
Sufficiency of evidence
Evidence supports auditor’s opinion
Financial statement disclosures
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28. Evaluate Results
Audit documentation review
Independent review
Summary of evidence evaluation
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29. YES NO
Completing the
Engagement Checklist
1. 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? ___ ___
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30. YES NO
Completing the
Engagement Checklist
2. 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? ___ ___
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31. YES NO
Completing the
Engagement Checklist
3. General documents
a. Were 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? ___ ___
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32. Evaluating Results and
Reaching Conclusions
Actual audit evidence
(by cycle, account,
and objective)
Audit procedures
Sample size
Items to select
Timing
Evaluate results
(by account and cycle)
Estimated misstatement
(by account)
Achieved audit risk
(by account and cycle)
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33. Evaluating Results and
Reaching Conclusions
Evaluate overall
financial statements
Estimated misstatement
(overall statements)
Achieved audit risk
(overall statements)
Issue
audit
report
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34. 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.
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35. Learning Objective 6
Communicate effectively with the
audit committee and management.
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36. Communicate with the Audit
Committee and Management
Communicate fraud and illegal acts
Communicate internal control deficiencies
Other communication with audit committee
Management letters
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37. Learning Objective 7
Identify the auditor’s
responsibilities when
facts affecting the audit
report are discovered
after its issuance.
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38. Period Covered by
Subsequent Events Review
Date client
issues financial
statements
3-26-05
Client’s ending
balance sheet
date
12-31-04
Audit
report
date
Period to which
review for
subsequent
events applies
3-11-05
Period for
processing
the financial
statements
Period in which
subsequent
discovery of
facts is made
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39. End of Chapter 24
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