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