© 2002 mcgraw-hill ryerson limited. all rights reserved. 17-1 completing the audit and reporting...

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© 2002 McGraw-Hill Ryerson Limited.

All rights reserved.

COMPLETING THE AUDIT AND REPORTING RESPONSIBILITIES

R&D : The Society of Accounting Education

Email: [email protected] Website: www.soae.edu.pk

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TOPICS COVERED

Review for contingent liabilities. Commitments. Review for subsequent events. Finalizing the audit. Communications with the audit committee and

management. Subsequent discovery of facts existing at the date

of the auditor's report.

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REVIEW FOR CONTINGENT LIABILITIES

Contingent liabilities are defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that ultimately will be resolved when some future event occurs or fails to occur.

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CICA 3290, CONTINGENCIES

Likely. The chance of occurrence (or non-occurrence) of the future event(s) is high;

Unlikely. The chance of occurrence (or non-occurrence) of future event(s) is slight;

Not determinable. The chance of occurrence (or non-occurrence) of the future event(s) cannot be determined.

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EXAMPLES OF CONTINGENT LIABILITIES

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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NORMAL AUDIT PROCEDURES FOR IDENTIFYING CONTINGENT

LIABILITIES Reading the minutes of board of directors and other

committees of the board, and shareholders. Reviewing contracts (e.g., loan agreements and leases). Reviewing income tax liability, tax returns, and CCRA

agents' reports. Confirming or otherwise documenting of guarantees

and letters of credit obtained from financial institutions or other lending agencies.

Inspecting other documents for possible guarantees.

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SPECIFIC AUDIT PROCEDURES FOR IDENTIFYING CONTINGENT

LIABILITIES Inquiry of and discussions with management about

policies and procedures for identifying, evaluating, and accounting for contingent liabilities.

Examination of documents in the entity's records such as correspondence and invoices from lawyers for pending or threatened lawsuits.

Obtaining a legal letter. Obtaining a representation letter.

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ENQUIRY LETTERS

A letter (referred to as an enquiry letter) sent to the client's lawyers is the primary means of obtaining or corroborating information about litigation, claims, and assessments.

An enquiry letter should be obtained from the entity's inside counsel if such a position exists.

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TYPES OF LITIGATION

Breach of contract Patent infringement Product liability

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TYPES OF LITIGATION(cont.)

Violations of legislation including: Securities laws. Anti-discrimination statues based on race, sex, age,

and other characteristics. Anti-trust laws. Income tax regulations. Environmental protection laws.

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COMMITMENTS

Companies enter into long-term commitments to purchase raw materials or to sell their product at a fixed price.

The main purposes for entering into such purchase or sales contracts is to obtain favorable pricing arrangements or to secure the availability of raw materials.

PurchaseContract

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REVIEW FOR SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements and auditor's report, that have a material effect on the financial statements.

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TYPES OF SUBSEQUENT EVENTS

Events that provide additional evidence about conditions that existed at the date of the balance sheet (Type I event).

Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (Type II event).

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EXAMPLES OF THE FIRST TYPE OF EVENT

A loss of an uncollectible account receivable resulting from continued deterioration of its financial condition leading to bankruptcy after the balance sheet date.

The settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year end financial statements.

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EXAMPLES OF THE SECOND TYPE OF EVENT

Purchase or disposal of a business. Sale of a capital stock or bond issue. Loss of a manufacturing facility or assets resulting

from a casualty such as a fire or flood. Losses on receivables arising from conditions such as a

casualty arising subsequent to the balance sheet date.

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DUAL DATING

For example, …February 25, 2002, except for Note 10, which is March 1, 2002.

Limit auditor’s responsibility.

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AUDIT PROCEDURES FOR SUBSEQUENT EVENTS

Read any interim financial statements that are available for the period after year end.

Examine the books of original entry for the subsequent events period.

Ask management about subsequent events. Read the available minutes of meetings of board of

directors and other committees.

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AUDIT PROCEDURES FOR SUBSEQUENT EVENTS (cont.)

Enquiry of client’s lawyers regarding claims and assessments.

Obtain a representation letter from management.

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FINALIZING THE AUDIT

Perform final analytical procedures. Evaluate the entity's ability to continue as a going

concern. Obtain a representation letter. Review working papers. Make final assessment of audit results. Evaluate financial statement presentation and

disclosure. Obtain independent review of the engagement.

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COMMUNICATIONS WITH THE AUDIT COMMITTEE

The communication should address the following matters: The auditor's responsibility under GAAS. Significant accounting policies. Management judgments and accounting estimates. Significant audit adjustments. Disagreements with management. Consultation with other accountants. Major issues discussed with management before the

auditor was retained. Difficulties encountered during the audit. Fraud involving senior management and fraud that

causes material misstatements in the financial statements.

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MANAGEMENT LETTER

It is normal practice for the auditor to prepare what is referred to as a management letter. The general intent of a management letter is to make recommendations to the client based on observations made during the audit and may include areas such as organizational structure and efficiency issues.

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SUBSEQUENT DISCOVERY OF FACTS EXISTING AT THE DATE OF THE

AUDITOR'S REPORT An auditor has no obligation to make any inquiries or

conduct any audit procedures after the financial statements and audit report have been issued.

However, facts may come to the auditor's attention after the issuance of the financial statements which may indicate that the financial statements are in error and the audit report is affected.

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SUBSEQUENT DISCOVERY OF FACTS

If the client refuses to cooperate , the auditor should notify the board of directors and take the following steps: Notify the client that the auditor's report must no

longer be associated with the financial statements. Notify any regulatory agencies having jurisdiction over

the client that the auditor report can no longer be relied upon.

Seek legal advice.

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Thank you

Research and Development of The Society of Accounting Education , Email: [email protected], Website: www.soae.edu.pk

Overall supervised by Dr. Ansar Ali Noor

© 2002 mcgraw-hill ryerson limited. all rights reserved. 17-1 completing the audit and reporting...

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