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Chapter SeventeenCompleting the Engagement
Chapter SeventeenCompleting the Engagement
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Contingency
A contingency is a liability that is uncertain because the possible outflow of resources from the entity will ultimately be resolved when some
future event occurs or fails to occur.
A contingency is a liability that is uncertain because the possible outflow of resources from the entity will ultimately be resolved when some
future event occurs or fails to occur.
Probable: The future event is likely to occur.
Neither probable nor remote: The chance of the future event occurring is less than likely but more than slight (remote).
Remote: The chance of the future event occurring is slight.
Probable: The future event is likely to occur.
Neither probable nor remote: The chance of the future event occurring is less than likely but more than slight (remote).
Remote: The chance of the future event occurring is slight.
Examples
• Pending or threatened litigation;
• Actual or possible claims and assessments;
• Income tax disputes;
• Product warranties or defects;
• Guarantees of obligations to others;
• Agreements to repurchase receivables that have been sold.
Examples
• Pending or threatened litigation;
• Actual or possible claims and assessments;
• Income tax disputes;
• Product warranties or defects;
• Guarantees of obligations to others;
• Agreements to repurchase receivables that have been sold.
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Audit Procedures for Identifying Contingencies
Read minutes of meetings of those charged with
governance, e.g. the board of directors.
Review contracts, loan agreements, leases and correspondence from government agencies.
Confirm or otherwise document guarantees and
letters of credit.
Inspect other documents for possible guarantees.
Review income tax liability, tax returns and tax authorities’ reports.
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Audit Procedures for Identifying Contingencies
Inquiry and discussion with management about its policies and
procedures for identifying, evaluating and accounting for
contingencies.
Examine documents in the entity’s records such as correspondence
and invoices from lawyers for pending or threatened lawsuits.
Obtain a legal letter that describes and evaluates any litigation, claims,
or assessments.
Obtain written representation from management that all litigation,
asserted and unasserted claims, and assessments have been
disclosed in accordance with the applicable financial reporting
framework.
Specific Audit Procedures Conducted Near Completion of Audit
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Legal Letters
A letter of audit inquiry (a legal letter) sent to the client’s lawyers is the primary means of
obtaining or corroborating information about litigation, claims, and assessments.
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Commitments
Long-term commitments are usually identified through inquiry of client personnel during the audit of the revenue and purchasing processes. In most cases, such commitments are disclosed in a note to the financial
statements.
Long-term contracts to purchase raw materials or sell their products at a fixed price.
Long-term contracts to purchase raw materials or sell their products at a fixed price.
To obtain a favourable pricing
arrangement.
To obtain a favourable pricing
arrangement.
To secure the availability of raw
materials.
To secure the availability of raw
materials.
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Review for Subsequent Events for Audit of Financial Statements
Balance Sheet Date
Type I Event
Affects estimates that are part of
financial statements.
Type II Event
Conditions did not exist at the balance sheet
date.
Require adjustment of the financial statements.
Require financial statement disclosure.
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Review for Subsequent Events for Audit of Financial Statements
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Subsequent Events Recorded or Disclosed after the Date of the Audit Report but before the Issuance of the Financial Statements
The auditor is not responsible for making any inquiries or conducting any audit procedures after the date of the audit
report.
However, subsequent events may come to the auditor’s attention after the date of the audit report but before the issuance of the financial statements, requiring adjustment
or disclose in the financial statements.
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Subsequent Events Recorded or Disclosed after the Date of the Audit Report but before the Issuance of the Financial Statements
When a subsequent event is recorded or disclosed in the financial statements after the date of the audit report but before the issuance of the financial statements, the
auditor provides a new audit report on the amended financial statements.
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Audit Procedures for Subsequent Events
Inquire of Management
Read Interim Financial
StatementsExamine the
Books of Original Entry
Examples of audit procedures
Read Minutes of Meetings
Inquire of Legal Counsel
Obtain Management
Representation Letter
Review Management Procedures
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Final Evidence Evaluation Processes
Perform final analytical procedures.
Evaluate entity’s ability to continue as a going
concern.
Obtain a representation letter.
Review working papers.
Final assessment of audit results.
Evaluation of financial statement presentation
and disclosure.
Obtain an independent review of the engagement.
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Going-Concern Considerations
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Going-Concern Considerations
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Going-Concern Considerations
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Proposed Adjusting Entries
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Independent Engagement Quality Review
Auditing standards (ISA 220) require for the audit of financial statements of listed companies that the
engagement partner appoints an engagement quality control reviewer.
Auditing standards (ISA 220) require for the audit of financial statements of listed companies that the
engagement partner appoints an engagement quality control reviewer.
An engagement quality control review is an objective evaluation of the significant judgments
made by the engagement team and the conclusions reached in formulating the auditor’s report.
An engagement quality control review is an objective evaluation of the significant judgments
made by the engagement team and the conclusions reached in formulating the auditor’s report.
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Archiving and Retention
The retention period is ordinarily not shorter than five years from the date of the audit report.
The retention period is ordinarily not shorter than five years from the date of the audit report.
Auditing standards (ISA 230) stipulate that the auditor prepares audit documentation that is
sufficient and appropriate to provide a record of the basis for the audit report and to provide evidence that the audit was performed in accordance with
ISAs and applicable legal and regulatory requirements.
Auditing standards (ISA 230) stipulate that the auditor prepares audit documentation that is
sufficient and appropriate to provide a record of the basis for the audit report and to provide evidence that the audit was performed in accordance with
ISAs and applicable legal and regulatory requirements.
Legislation and auditing standards require auditors to retain their audit files for a number of years after
an audit report is filed.
Legislation and auditing standards require auditors to retain their audit files for a number of years after
an audit report is filed.
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Communication with Those Charged with Governance
Auditing standards (ISA 260) require that the auditor communicates to those charged with governance matters related to the financial
statement audit that are relevant to the responsibilities of those charged with
governance.
Auditing standards (ISA 260) require that the auditor communicates to those charged with governance matters related to the financial
statement audit that are relevant to the responsibilities of those charged with
governance.
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17-21Facts Existing at the Date of the Auditor’s Report Discovered after the Issuance of the Financial statements
The auditor has no obligation to conduct any audit procedures after the financial statements and
the audit report have been issued.
The auditor has no obligation to conduct any audit procedures after the financial statements and
the audit report have been issued.
The auditor may become aware of facts, which
existed at the date of the audit report, that might
have affected the auditor’s report.
The auditor may become aware of facts, which
existed at the date of the audit report, that might
have affected the auditor’s report.
When such facts are encountered, the auditor should determine whether the facts are reliable and whether they existed at the date of the audit
report.
When such facts are encountered, the auditor should determine whether the facts are reliable and whether they existed at the date of the audit
report.
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17-22Facts Existing at the Date of the Auditor’s Report Discovered after the Issuance of the Financial statements
When the client refuses to do the necessary revision of the financial
statements, the auditor must:
When the client refuses to do the necessary revision of the financial
statements, the auditor must:
Notify the client that the auditor’s report must no longer be
associated with the financial statements.
Notify the client that the auditor’s report must no longer be
associated with the financial statements.
Notify regulatory authorities and other persons relying on the
auditor’s report that the report can no longer be relied upon.
Notify regulatory authorities and other persons relying on the
auditor’s report that the report can no longer be relied upon.
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End of Chapter 17
