Chapter 24Completing the Audit
Presentation Outline
I. Review for Contingent Liabilities
II. Review for Subsequent Events
III. Accumulate Final Evidence
IV. Evaluate Results
V. Issue Audit Report
VI. Communicate with Audit Committee and Management
VII. Subsequent Discovery of Facts
I. Review for Contingent Liabilities
A. Contingent Liability ConditionsB. Likelihood of Occurrence and Financial
Statement TreatmentC. Commitments
D. Common Audit Procedures for ContingenciesE. Inquiry of Client’s Attorney
F. Sarbanes-Oxley and Attorneys
A. Contingent Liability ConditionsThree conditions are required
for a contingent liability to exist:
There is a potential future payment to an outside party or the impairment of some
other asset that would result from an existing
condition. There is uncertainty about
the amount of the future payment or impairment. The outcome will be resolved by some future
event(s).
Note: Page 712 contains examples of possible contingencies.
B. Likelihood of Occurrence and Financial Statement Treatment
Likelihood of Occurrence of Event Financial Statement Treatment
Remote (slight chance) No disclosure is necessary
Reasonably possible (more than remote, but
less than probable)Footnote disclosure is necessary
Probable (likely to occur)
If the amount can be reasonably estimated, financial statement
accounts are adjusted.If the amount cannot be
reasonably estimated, footnote disclosure is necessary.
C. Commitments
In a commitment, the most important characteristic is the agreement to commit the firm to a set of fixed conditions in the future
regardless of what happens to profits or the economy as
a whole. All commitments are ordinarily either described
together in a separate footnote or combined in the
contingencies footnote.
D. Common Audit Procedures for Contingencies
Inquire of client management about unrecorded contingencies.
Review current and prior year revenue agent reports for income tax settlements.
Review of board of director minutes.Analysis of legal expense and related invoices
from legal counsel.Obtain a letter from client’s legal counsel.Review of bank confirmations and notes.
E. Inquiry of Client’s AttorneyThe standard inquiry to the client’s attorney should include
the following: A list including (1) pending threatened litigation and (2)
asserted and unasserted claims with which the attorney as had significant involvement.
A request that the attorney furnish information about the progress of each item listed.
A request for the identification of any unlisted pending or threatened legal actions or a statement that the
client’s list is complete. A statement informing the attorney of their
responsibility to inform client management of legal matters requiring disclosure in the financial statements
and to respond directly to the auditor.Note: Page 715 contains an example of the letter.
F. Sarbanes-Oxley and Attorneys
The Sarbanes-Oxley Act directed the SEC to issue rules requiring attorneys to report
material violations of the federal securities laws to the chief legal officer, CEO, and possibly the
audit committee.Previously, attorneys only reported crimes when there was
a threat of physical harm or death or the release of
hazardous materials or defective products.
The American Bar Assoc.has amended the attorney-client
confidentiality rules topermit breach of
confidentiality for crime and fraud of
an audit client.
II. Review for Subsequent Events
A. Time Period of Auditor Responsibility
B. Subsequent Events Requiring Adjustment
C. Subsequent Events Requiring Disclosure
D. Audit Tests for Subsequent Events
E. Dual Dating for Subsequent Events
A. Time Period of Auditor Responsibility
The auditor’s responsibility for reviewing subsequent events is normally limited to the period beginning with the balance sheet date and ending with the date of the auditor’s report.
Client’s endingbalance sheet
date
Auditreportdate
Date clientissues financial
statements
Period to whichreview forsubsequent
events applies
Period forprocessing
the financialstatements
12-31-02 3-11-03 3-26-03
B. Subsequent Events Requiring Adjustment
Subsequent events require financial statement adjustment if they provide additional
information regarding conditions that:
Existed at the balance sheet date, and
Affect the fair presentation of account
balances.
C. Subsequent Events Requiring Disclosure
Subsequent events of this type provide evidence of conditions that did
not exist at the balance sheet date, but are so significant that they require disclosure. Page 718 provides
some examples.
D. Audit Tests for Subsequent Events
Inquiry of key client management.
Correspondence with attorneys
Review of internal client statements and other
records prepared subsequent to the balance
sheet date Examine minutes of board
of director meetings Obtain a letter of
representation from client management
E. Dual Dating for Subsequent Events
Occasionally, the auditor determines that an important subsequent event occurred after the field
work was completed but before the audit report was issued.
The auditor may chose to (1) extend the date of field work to cover the discovery, or (2) issue a dual-dated audit report. For this 2nd option, the first date would be for the completion of field
work except for a specific exception. The next date would cover the date of the discovery of the
subsequent event after the field work date.
III. Accumulate Final Evidence
A. Perform Final Analytical Procedures
B. Evaluate Going-Concern Assumption
C. Obtain Client Management Representation Letter
D. Consider Information Accompanying the Basic Financial Statements
E. Read Other Information in the Annual Report
A. Perform Final Analytical Procedures
Analytical procedures done during the
completion of the audit are useful as:
A final review for material misstatements or financial problems not noted during other
testing.Providing a final objective look at the financial statements.
B. Evaluate Going-Concern Assumption
SAS 59 requires the auditor to evaluate
whether there is substantial doubt
about a client’s ability to continue as a going
concern for at least one year beyond the balance sheet date.
C. Obtain Client Management Representation Letter
SAS 85 requires the auditor to obtain a letter of representation documenting client management’s most
important oral representations during the audit.Refusal to furnish the letter would require a qualified
opinion or disclaimer of opinion.SAS 85 and PCAOB Standard 2 suggest categories of specific matters that should be included in the letter. See
pages 721-722.
D. Consider Information Accompanying the Basic Financial Statements
In many cases, the auditor has not performed a sufficiently detailed audit to justify an
opinion on the additional information. Two types of opinions are allowed: A positive opinion indicating a high level of
assurance. A disclaimer indicating
no assurance.
Note: Page 723 contains examples of report wording.
E. Read Other Information in the Annual Report
SAS 8 requires the auditor to read other information
included in annual reports pertaining directly to the
financial statements. Examples are the president’s
letter and explanations of company activities.
If the client refuses to modify material inconsistencies, the
auditor should add an explanatory paragraph to the
audit report or withdraw from the engagement.
IV. Evaluate Results
A. The Sufficiency of Audit Evidence
B. Support for the Auditor’s Opinion
C. Financial Statement Disclosures
D. Audit Documentation Review
E. Independent Review
F. Summary of Evidence Evaluation
A. The Sufficiency of Audit EvidenceAs an aid in drawing final conclusions about the adequacy of the audit evidence, auditors
often use a completing the engagement checklist (See Figure 24-5 on page 724).
The auditor has two choices if sufficient evidence has not been
obtained:Obtain additional evidence
Issue a qualified or disclaimer of opinion
B. Support for the Auditor’s Opinion
It is necessary to combine individually immaterial
misstatements to evaluate whether the combined
amount is material. (See Figure 24-6 on page 725)
The auditor has two choices if the financial statements are
not fairly stated:Have statements revised to
auditor satisfaction.Issue a qualified or adverse
opinion.
C. Financial Statement Disclosures
Adequate disclosure includes consideration of all of the statements, including the
related notes. Account balance verification
also includes consistent application of GAAP with the
preceding year. Many CPA firms require the
completion of a financial statement disclosure checklist. (See Figure 24-7 on page 727)
D. Audit Documentation ReviewThe review of audit
documentation generally involves three increasing
levels of personnel, ending with the partner in charge of the audit. Three main
reasons for review include: Evaluation of performance
of inexperienced personnel Ensure that audit meets
CPA firm’s standard of performance.
Counteract bias in auditor judgment.
Partner
Auditor Senior
Auditor Manager
Auditor
E. Independent Review
At the completion of larger audits, it is common to have the financial statements and the entire set of audit files reviewed by a completely independent reviewer who has not participated in the
engagement.A independent review is
required for SEC engagements.
Reviewer takes an adversary position.
F. Summary of Audit Evidence
Auditor evaluates the sufficiency of audit evidence by first evaluating achieved audit risk, by account and by
cycle, and then making the same evaluation for the overall financial statements.
Auditor also (often simultaneously) evaluates whether the evidence supports the audit opinion by first
estimating misstatements in each account and then for the overall financial statements.
V. Issue the Audit Report
The auditor should not decide the appropriate audit report until all evidence has
been accumulated and evaluated.
Because the audit report is the only thing that many
users see in the audit process and the
consequences of issuing an inappropriate report can be severe, it is critical that the
report be correct.
VI. Communicate with the Audit Committee and Management
A. Audit Committee Communication
B. Management Communication
A. Audit Committee Communication SAS 99 and SAS 54 require the
auditor to communicate all fraud and illegal acts to the audit
committee, regardless of materiality.
Auditor must also communicate significant deficiencies and
material weaknesses in the design or operation of internal control.
SAS 61 states that certain major items be communicated to the audit committee for all SEC
engagements and other audits where there is an audit committee
or similarly designated body. (See page 729)
B. Management Communication
A management letter is intended to inform client personnel of the CPA’s recommendations for
improving any aspect of the client’s business.
A management letter is optional and is intended to help the client operate its business more effectively.
VII. Subsequent Discovery of Facts
If the auditor becomes aware after the financial statements have been issued to some information included in the statements is materially misleading, the auditor has an obligation to make certain that users who are relying on the financial statements are informed about the
misstatements.
Request the client to issue an immediate revision of the financial statements containing an explanation of the reasons.
Client should inform the SEC and other regulatory agencies of the misleading financial statements.
If the client refuses to cooperate, the auditor must inform the board of directors. Auditor must also notify regulatory agencies and, when practical, each person who
relies on the financial statements, that the statements are no longer trustworthy.
Summary of the Audit Process
Phase I
Phase II
Phase III
Phase IV
Plan and designan audit approach.
Perform tests ofcontrols and
substantive testsof transactions.
Perform analyticalprocedures andtests of detailsof balances.
Complete theaudit and issuean audit report.
Phase IV –Completing the Audit
Review forcontingentliabilities
Review for subsequent events
Accumulatefinal evidence
Evaluate results
Issue audit report
Communicate with audit committeeand management