9.401 Auditing

Chapter 21Chapter 21

Completing the AuditCompleting the Audit

Audit Completion Activities

Reviewing for contingent liabilitiesReviewing for contingent liabilities Reviewing for subsequent eventsReviewing for subsequent events Accumulating final evidenceAccumulating final evidence Evaluating resultsEvaluating results Working Paper ReviewWorking Paper Review Writing the audit Report (see chapt 2)Writing the audit Report (see chapt 2) Read annual reportRead annual report Audit CorrespondenceAudit Correspondence

Review for contingent liabilities

Goal:Goal: Identify all contingent liabilitiesIdentify all contingent liabilities Determine likelihoods and amts involvedDetermine likelihoods and amts involved Ensure treatment & disclosure is Ensure treatment & disclosure is

appropriateappropriate

Techniques for contingent liabilities and commitments

1)1) Consider evidence already gatheredConsider evidence already gathered• Confirmations, warranties etc. Confirmations, warranties etc.

2)2) Enquiry of managementEnquiry of management

3)3) Review income tax assessmentsReview income tax assessments

4)4) Review minutes of meetingsReview minutes of meetings

5)5) Analyze legal expenses-review invoicesAnalyze legal expenses-review invoices

6)6) Confirm client lawyers (next slide)Confirm client lawyers (next slide)

7)7) Read contracts etc.Read contracts etc.

Lawyer’s letters Sent to all lawyers used by clientSent to all lawyers used by client Sent on client letterhead, signed by client, Sent on client letterhead, signed by client,

with instructions to return confirmation to with instructions to return confirmation to auditorauditor

Contains:Contains: List, description & evaluation of all known List, description & evaluation of all known

claimsclaims Request to advise if info is reasonableRequest to advise if info is reasonable Request to advise if list is incompleteRequest to advise if list is incomplete

Lawyers are encouraged to respond but may Lawyers are encouraged to respond but may not or may use slightly different terminologynot or may use slightly different terminology

Review for subsequent Events Auditors are responsible for reviewing Auditors are responsible for reviewing

events up to date of audit report events up to date of audit report (=“substantial completion of fieldwork”(=“substantial completion of fieldwork”

Goals:Goals:

1)1) Identify information having direct Identify information having direct effect on f/s and requiring adjustment effect on f/s and requiring adjustment (=indicates condition existing at year (=indicates condition existing at year end)end)

2)2) Identify important events requiring Identify important events requiring disclosuredisclosure

Techniques for subsequent events1)1) Subsequent receiptsSubsequent receipts

2)2) Subsequent paymentsSubsequent payments

3)3) Settlement prices of subsequent transactionsSettlement prices of subsequent transactions

4)4) Enquiry of managementEnquiry of management

5)5) Review minutes of meetingsReview minutes of meetings

6)6) Confirm client lawyers Confirm client lawyers

7)7) Review internal statements for subsequent pd.Review internal statements for subsequent pd.

8)8) Review books of account for significant or Review books of account for significant or unusual transactionsunusual transactions

9)9) Letter of representationLetter of representation

Date of audit report

Date = substantial completion of fieldwork, Date = substantial completion of fieldwork, including subsequent event reviewincluding subsequent event review

If a subsequent event arises after that date If a subsequent event arises after that date and before issue of report, auditor can:and before issue of report, auditor can: Extend fieldwork (subsequent event Extend fieldwork (subsequent event

review for review for allall events) to new date or events) to new date or Limit review to new event only and Limit review to new event only and

double-date reportdouble-date report

Subsequent discovery of facts

Auditor not actively engaged to look for Auditor not actively engaged to look for info after release of audit report, but some info after release of audit report, but some may come to their attention.may come to their attention.

If relates to condition that existed before If relates to condition that existed before audit report issue and material:audit report issue and material: Auditor must audit subsequent eventAuditor must audit subsequent event Request client re-issue and auditor re-Request client re-issue and auditor re-

issues reportissues report If client refuses, consult legal adviceIf client refuses, consult legal advice

Accumulating Final Evidence

Final Analytical ProceduresFinal Analytical Procedures Evaluate Going Concern AssumptionEvaluate Going Concern Assumption

Client Representation Letter

Goal:Goal:

1)1) Impress upon mgmt that f/s are their Impress upon mgmt that f/s are their reponsibilityreponsibility

2)2) Document responses of mgmtDocument responses of mgmt

Client Representations On the client’s letterhead, addressed to the auditor, signed by On the client’s letterhead, addressed to the auditor, signed by

responsible officers and dated as of the auditor’s reports. responsible officers and dated as of the auditor’s reports. Contains, among other things:Contains, among other things: Acknowledgement of primary responsibility for fair Acknowledgement of primary responsibility for fair

presentation of financial statements presentation of financial statements in conformity with GAAPin conformity with GAAP

Availability of all financial Availability of all financial records and related datarecords and related data

Completeness of the minutes Completeness of the minutes of meeting of stockholders, of meeting of stockholders, directors, and important committeesdirectors, and important committees

Info about related partiesInfo about related parties Irregularities involving management or employeesIrregularities involving management or employees Plans or intentions affecting b/s items Plans or intentions affecting b/s items see HB 7100see HB 7100

These representations are not substitutes for corroborating evidence obtainable by the auditor.

These representations are not substitutes for corroborating evidence obtainable by the auditor.

Evaluating Results Cumulative known errors, most likely and Cumulative known errors, most likely and

possible errors, including those on possible errors, including those on opening opening balancesbalances on: on: Total assetsTotal assets Total liabilitiesTotal liabilities Current assets/liabilitiesCurrent assets/liabilities Net incomeNet income

Qualitative aspectsQualitative aspects Overall fair presentation of f/s, including Overall fair presentation of f/s, including

disclosuredisclosure

Working Paper Review

Goals:Goals:

1)1) Evaluate staffEvaluate staff

2)2) Ensure audit meets firm standards and Ensure audit meets firm standards and GAASGAAS

3)3) Counteract biasesCounteract biases• Primacy, recencyPrimacy, recency• Internal control descriptions prepared Internal control descriptions prepared

by client (L. Kopp)by client (L. Kopp)

Working Paper Review: to consider Planning decisions were adequatePlanning decisions were adequate All work complete and properly All work complete and properly

documenteddocumented Conclusions appropriateConclusions appropriate Analytical review resultsAnalytical review results

Other Information and Supplementary Information Other Information Section 7500.13 - Other Information Section 7500.13 -

Auditor’s have and obligation to read (study) the Auditor’s have and obligation to read (study) the information and determine whether it is inconsistent information and determine whether it is inconsistent with the audited financial statements. with the audited financial statements.

However the auditor is not required to review press However the auditor is not required to review press releases, analyst’s interviews or other forms of releases, analyst’s interviews or other forms of irregular financial new releases specifically engaged irregular financial new releases specifically engaged

by the client to do soby the client to do so.. 1313 The auditor should read the other information in The auditor should read the other information in

the annual report and consider whether any of this the annual report and consider whether any of this information is inconsistent with the financial statements information is inconsistent with the financial statements on which he has reported. [JAN. 1986]on which he has reported. [JAN. 1986]

Other Information and Supplementary Information Other Information Section 7500.13 - Other Information Section 7500.13 -

Auditor’s have and obligation to read (study) the Auditor’s have and obligation to read (study) the information and determine whether it is inconsistent information and determine whether it is inconsistent with the audited financial statements. with the audited financial statements.

However the auditor is not required to review press However the auditor is not required to review press releases, analyst’s interviews or other forms of releases, analyst’s interviews or other forms of irregular financial new releases specifically engaged irregular financial new releases specifically engaged

by the client to do soby the client to do so.. 1313 The auditor should read the other information in The auditor should read the other information in

the annual report and consider whether any of this the annual report and consider whether any of this information is inconsistent with the financial statements information is inconsistent with the financial statements on which he has reported. [JAN. 1986]on which he has reported. [JAN. 1986]

Read annual report

Auditors have and obligation to read (study) Auditors have and obligation to read (study) the information and determine whether it is the information and determine whether it is inconsistent with the audited financial inconsistent with the audited financial statements. Any inconsistencies must be statements. Any inconsistencies must be corrected.corrected.

NOT required to review press releases, NOT required to review press releases, analyst’s interviews or other forms of analyst’s interviews or other forms of irregular financial new releases specifically irregular financial new releases specifically engaged by the client to do so.engaged by the client to do so.

Audit Communications

Necessary communication with mgmt (and Necessary communication with mgmt (and audit committee):audit committee): Misstatements (other than trivial ones)Misstatements (other than trivial ones) Illegal or possibly illegal actsIllegal or possibly illegal acts Internal control “reportable conditions” Internal control “reportable conditions”

(=significant deficiencies in design or (=significant deficiencies in design or operation)operation)

Communications with audit committee Auditor vs mgmt responsibilityAuditor vs mgmt responsibility Significant planning decisionsSignificant planning decisions Significant acctg policiesSignificant acctg policies Areas of audit sensitivity, mgmt estimatesAreas of audit sensitivity, mgmt estimates Disagreements with mgmt, major issues Disagreements with mgmt, major issues

discusseddiscussed Difficulties encounteredDifficulties encountered

Management letters

OptionalOptional Areas of improvement in internal control, Areas of improvement in internal control,

efficiency and effectiveness in operationsefficiency and effectiveness in operations