completing audit

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24 - 1 Prentice Hall Business Publishing, Prentice Hall Business Publishing, Auditing 11/e, Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder Completing the Completing the Audit Audit Chapter 24 Chapter 24

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Page 1: completing audit

24 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Completing the AuditCompleting the Audit

Chapter 24Chapter 24

Page 2: completing audit

24 - 2©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 1Learning Objective 1

Conduct a review for contingentConduct a review for contingentliabilities and commitments.liabilities and commitments.

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24 - 3©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Summary of the Audit ProcessSummary of the Audit Process

Phase IPhase IPlan and design an auditPlan and design an auditapproach.approach.

Phase IIPhase IIPerform tests of controlsPerform tests of controlsand substantive testsand substantive testsof transactions.of transactions.

Phase IIIPhase IIIPerform analyticalPerform analyticalprocedures and testsprocedures and testsof details of balances.of details of balances.

Phase IVPhase IVComplete the audit andComplete the audit andissue an audit report.issue an audit report.

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24 - 4©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Phase IV – Completing the AuditPhase IV – Completing the Audit

Review for contingentReview for contingentliabilities.liabilities.

Review for Review for subsequent events.subsequent events.

Accumulate finalAccumulate finalevidence.evidence.

Evaluate results.Evaluate results.

Issue audit report.Issue audit report.

Communicate with Communicate with audit committeeaudit committeeand management.and management.

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24 - 5©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Contingent LiabilitiesContingent Liabilities

A contingent liability is a potential futureA contingent liability is a potential futureobligation to an outside party for anobligation to an outside party for anunknown amount resulting from activitiesunknown amount resulting from activitiesthat have already taken place.that have already taken place.

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24 - 6©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Likelihood of Occurrence and Likelihood of Occurrence and Financial Statement TreatmentFinancial Statement Treatment

ReasonablyReasonablypossiblepossible

Footnote disclosure isFootnote disclosure isnecessarynecessary

ProbableProbable(likely to occur)(likely to occur)

Adjust financial statementsAdjust financial statementsoror note disclosure note disclosure

RemoteRemote(slight chance)(slight chance)

No disclosureNo disclosurenecessarynecessary

Likelihood ofLikelihood ofoccurrence of eventoccurrence of event

Financial statementFinancial statementtreatmenttreatment

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24 - 7©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Auditor’s ConcernsAuditor’s Concerns

Pending litigation for patent infringement,Pending litigation for patent infringement, product liability, or other actionsproduct liability, or other actions Income tax disputesIncome tax disputes Product warrantiesProduct warranties Notes receivable discountedNotes receivable discounted Guarantees of obligations of othersGuarantees of obligations of others Unused balances of outstanding letters of creditUnused balances of outstanding letters of credit

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24 - 8©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Audit Procedures for Finding Audit Procedures for Finding ContingenciesContingencies

Inquire of management (orally and inInquire of management (orally and inwriting) about the possibility ofwriting) about the possibility of unrecorded contingencies.unrecorded contingencies.

Review current and previous years’ internalReview current and previous years’ internalrevenue reports for income tax settlements.revenue reports for income tax settlements.

Review the minutes of directors’ andReview the minutes of directors’ andstockholders’ meetings for indicationsstockholders’ meetings for indications of lawsuits or other contingencies.of lawsuits or other contingencies.

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24 - 9©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Audit Procedures for Finding Audit Procedures for Finding ContingenciesContingencies

Analyze legal expenses and review invoicesAnalyze legal expenses and review invoicesand statements from legal counsel.and statements from legal counsel.

Obtain a letter from each major attorney of theObtain a letter from each major attorney of theclient as to the status of pending litigation.client as to the status of pending litigation.

Review audit documentation for any informationReview audit documentation for any informationthat may indicate a potential contingency.that may indicate a potential contingency.

Examine letters of credit in force.Examine letters of credit in force.

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24 - 10©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 2Learning Objective 2

Obtain and evaluate letters fromObtain and evaluate letters fromthe client’s attorneys.the client’s attorneys.

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24 - 11©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Inquiry of Client’s AttorneysInquiry of Client’s Attorneys

A list including (1) pending threatened litigationA list including (1) pending threatened litigation and (2) asserted or unasserted claims orand (2) asserted or unasserted claims or assessments with which the attorneyassessments with which the attorneyhas had involvement.has had involvement.

A request that the attorney furnish informationA request that the attorney furnish informationor comment about the progress of each item listed.or comment about the progress of each item listed.

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24 - 12©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Inquiry of Client’s AttorneysInquiry of Client’s Attorneys

A request for the identification of any unlistedA request for the identification of any unlistedpending or threatened legal action or apending or threatened legal action or astatement that the client’s list is complete.statement that the client’s list is complete.

A statement informing the attorney of the attorney’sA statement informing the attorney of the attorney’sresponsibility to inform management of legal mattersresponsibility to inform management of legal mattersrequiring disclosure in the financial statementsrequiring disclosure in the financial statementsand to respond directly to the auditor.and to respond directly to the auditor.

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24 - 13©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Sarbanes-Oxley ActSarbanes-Oxley Act

Congress included provisions in this act directingCongress included provisions in this act directingthe SEC to issue rules requiring attorneys servingthe SEC to issue rules requiring attorneys servingpublic companies to report material violationspublic companies to report material violationsby the company of federal securities laws.by the company of federal securities laws.

The American Bar Association amended itsThe American Bar Association amended itsattorney-client confidentiality rules to permitattorney-client confidentiality rules to permitattorneys to breach confidentiality if a clientattorneys to breach confidentiality if a clientis committing a crime or fraud.is committing a crime or fraud.

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24 - 14©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 3Learning Objective 3

Conduct a post-balance-sheetConduct a post-balance-sheetreview for subsequent events.review for subsequent events.

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24 - 15©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Period Covered by Subsequent Period Covered by Subsequent Events ReviewEvents Review

Client’s endingClient’s endingbalance sheetbalance sheet

datedate

12-31-0512-31-05

Date clientDate clientissues financialissues financial

statementsstatements

3-26-063-26-06

AuditAuditreportreportdatedate

3-11-063-11-06

Period to which review forPeriod to which review forsubsequent events appliessubsequent events applies

Period forPeriod forprocessingprocessingthe financialthe financialstatementsstatements

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24 - 16©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Types of Subsequent EventsTypes of Subsequent Events

11Those that have a direct effectThose that have a direct effecton the financial statementson the financial statementsand require adjustmentand require adjustment

22Those that have Those that have nono direct effect direct effecton the financial statements buton the financial statements butfor which disclosure is advisablefor which disclosure is advisable

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24 - 17©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Requiring AdjustmentRequiring Adjustment

Declaration of bankruptcy by a customerDeclaration of bankruptcy by a customer with an accounts receivable balancewith an accounts receivable balance Settlement of a litigation at an amountSettlement of a litigation at an amount different from the amount recordeddifferent from the amount recorded on the bookson the books Disposal of equipment not being used inDisposal of equipment not being used in operations at a price below the currentoperations at a price below the current book valuebook value Sale of investments at a price belowSale of investments at a price below recorded costrecorded cost

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24 - 18©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Advisability of DisclosureAdvisability of Disclosure

Decline in the market value of securitiesDecline in the market value of securities held for temporary investment or resaleheld for temporary investment or resale Issuance of bonds or equity securitiesIssuance of bonds or equity securities Decline in the market value of inventoryDecline in the market value of inventory as a consequence of government actionas a consequence of government action barring further sale of a productbarring further sale of a product Uninsured loss of inventories as a resultUninsured loss of inventories as a result of fireof fire A merger or an acquisitionA merger or an acquisition

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24 - 19©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Audit TestsAudit Tests

Procedures normally integrated asProcedures normally integrated asa part of the verification of year-enda part of the verification of year-endaccount balancesaccount balances

Procedures performed specifically forProcedures performed specifically forthe purpose of discovering events orthe purpose of discovering events ortransactions that must be recognizedtransactions that must be recognizedas subsequent eventsas subsequent events

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24 - 20©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Inquire of management.Inquire of management. Correspond with attorneys.Correspond with attorneys. Review internal statements preparedReview internal statements prepared subsequent to the balance sheet date.subsequent to the balance sheet date. Review records prepared subsequentReview records prepared subsequent to the balance sheet date.to the balance sheet date. Examine minutes issued subsequentExamine minutes issued subsequent to the balance sheet date.to the balance sheet date. Obtain a letter of representation,Obtain a letter of representation,

Audit TestsAudit Tests

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24 - 21©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Dual DatingDual Dating

The first date is the date for theThe first date is the date for thecompletion of field work exceptcompletion of field work exceptfor a specific exception.for a specific exception.

The second date, which isThe second date, which isalways later, deals withalways later, deals withthe exception.the exception.

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24 - 22©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 4Learning Objective 4

Design and perform the final stepsDesign and perform the final stepsin the evidence-accumulationin the evidence-accumulationsegment of the audit.segment of the audit.

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24 - 23©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

1. Perform final analytical procedures.1. Perform final analytical procedures.2. Evaluate the going-concern assumption.2. Evaluate the going-concern assumption.3. Obtain a management representation letter.3. Obtain a management representation letter.4. Consider information accompanying the4. Consider information accompanying the basic financial statements.basic financial statements.5. Read other information in the annual report.5. Read other information in the annual report.

Final Evidence AccumulationFinal Evidence Accumulation

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24 - 24©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Management Representation Management Representation LetterLetter

To impress upon management its responsibility To impress upon management its responsibility for the assertions in the financial statementsfor the assertions in the financial statements

To document the responses from managementTo document the responses from management to inquiries about various aspects of the audit*to inquiries about various aspects of the audit*

* No earlier than audit report date* No earlier than audit report date

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24 - 25©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

1. Financial statements1. Financial statements2. Completeness of information2. Completeness of information3. Recognition, measurement, and disclosure3. Recognition, measurement, and disclosure4. Subsequent events4. Subsequent events

Management Representation Management Representation LetterLetter

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24 - 26©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

1. Management’s acknowledgment of its1. Management’s acknowledgment of its responsibility for establishing andresponsibility for establishing and maintaining effective internal controlmaintaining effective internal control over financial reportingover financial reporting2. Management’s conclusion about the2. Management’s conclusion about the effectiveness of internal control overeffectiveness of internal control over financial reporting as of the end offinancial reporting as of the end of the fiscal periodthe fiscal period3. Disclosure of all deficiencies3. Disclosure of all deficiencies4. Management’s knowledge of any fraud4. Management’s knowledge of any fraud

Management Representation Management Representation Letter: Internal ControlLetter: Internal Control

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24 - 27©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Information Accompanying Basic Information Accompanying Basic Financial StatementsFinancial Statements

Balance sheetBalance sheetIncome statementIncome statement

Statement ofStatement ofcash flowscash flows

FootnotesFootnotesDetailed comparativeDetailed comparative

statementsstatements

Statistical dataStatistical dataSchedule ofSchedule of

insurance coverageinsurance coverage

BasicBasicfinancialfinancial

statementsstatements

StandardStandardauditor’sauditor’s

reportreport

InformationInformationaccompanyingaccompanyingbasic financialbasic financial

statementsstatements

Separate paragraph –Separate paragraph –unqualified, qualified,unqualified, qualified,

or disclaimeror disclaimer

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24 - 28©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Information Accompanying Basic Information Accompanying Basic Financial StatementsFinancial Statements•2 opinions:2 opinions:

•Positive opinionPositive opinion•Disclaimer-no assuranceDisclaimer-no assurance

•See example of audit opinion on page 716See example of audit opinion on page 716

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24 - 29©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

5. Read other information 5. Read other information

For example: Chairman’s statementFor example: Chairman’s statement

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24 - 30©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 5Learning Objective 5

Integrate the audit evidenceIntegrate the audit evidencegathered, and evaluate thegathered, and evaluate theoverall audit results.overall audit results.

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24 - 31©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Evaluate ResultsEvaluate Results1. Sufficiency of evidence : 1. Sufficiency of evidence :

•if not sufficient-Additional evidence. if not sufficient-Additional evidence. •or qualified/disclaimer.or qualified/disclaimer.•Using checklist.Using checklist.

2. Evidence supports auditor’s opinion: 2. Evidence supports auditor’s opinion: • Immaterial misstatement- totaled up.Immaterial misstatement- totaled up.• Refer audit schedule.Refer audit schedule.3. Financial statement disclosures:3. Financial statement disclosures:• Disclosure checklistDisclosure checklist

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24 - 32©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Evaluate ResultsEvaluate Results4. Audit documentation review:4. Audit documentation review:• Evaluate performance of inexperience auditorEvaluate performance of inexperience auditor• Meet audit standardMeet audit standard• Counter act bias-audit judgementCounter act bias-audit judgement

5. Independent review:5. Independent review:• Larger auditLarger audit

6. Summary of evidence evaluation6. Summary of evidence evaluation

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24 - 33©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Completing the Engagement Completing the Engagement ChecklistChecklist

YESYES NONO1.1. Examination of prior year’s auditExamination of prior year’s audit

documentationdocumentationa.a. Were last year’s audit files examinedWere last year’s audit files examined

for areas of emphasis in thefor areas of emphasis in thecurrent-year audit?current-year audit?

b.b. Was the permanent file reviewed forWas the permanent file reviewed foritems that affect the current year?items that affect the current year?

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24 - 34©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Completing the Engagement Completing the Engagement ChecklistChecklist

YESYES NONO2.2. Internal controlInternal control

a.a. Has internal control been adequatelyHas internal control been adequatelyunderstood?understood?

b.b. Is the scope of the audit adequate inIs the scope of the audit adequate inlight of the assessed control risk?light of the assessed control risk?

c.c. Have all major weaknesses beenHave all major weaknesses beenincluded as reportable conditions inincluded as reportable conditions ina letter to the audit committee or toa letter to the audit committee or tosenior management?senior management?

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24 - 35©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Completing the Engagement Completing the Engagement ChecklistChecklist

YESYES NONO3.3. General documentsGeneral documents

a.a. Were all current-year minutes andWere all current-year minutes andresolutions reviewed, abstracted,resolutions reviewed, abstracted,and followed up?and followed up?

b.b. Has the permanent file beenHas the permanent file beenupdated?updated?

c.c. Have all major contracts andHave all major contracts andagreements been reviewed andagreements been reviewed andabstracted and copied with allabstracted and copied with allexisting legal requirements?existing legal requirements?

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24 - 36©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Evaluating Results and Reaching Evaluating Results and Reaching ConclusionsConclusions

Actual audit evidenceActual audit evidence (by cycle, account,(by cycle, account, and objective)and objective)

Audit proceduresAudit proceduresSample sizeSample sizeItems to selectItems to selectTimingTiming

Evaluate resultsEvaluate results (by account and cycle)(by account and cycle)

Estimated misstatementEstimated misstatement (by account)(by account)Achieved audit riskAchieved audit risk (by account and cycle)(by account and cycle)

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24 - 37©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Evaluating Results and Reaching Evaluating Results and Reaching ConclusionsConclusions

Evaluate overallEvaluate overall financial statementsfinancial statements

Estimated misstatementEstimated misstatement (overall statements)(overall statements)Achieved audit riskAchieved audit risk (overall statements)(overall statements)

IssueIssueauditauditreportreport

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24 - 38©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

The audit report is the only thing that mostThe audit report is the only thing that mostusers see in the audit process, and theusers see in the audit process, and theconsequences of issuing an inappropriateconsequences of issuing an inappropriatereport can be severe.report can be severe.

Issue the Audit ReportIssue the Audit Report

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24 - 39©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 6Learning Objective 6

Communicate effectively with the Communicate effectively with the audit committee and management.audit committee and management.

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24 - 40©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

1.1. Communicate fraud and illegal acts: ISA 240Communicate fraud and illegal acts: ISA 2402.2. Communicate internal control deficienciesCommunicate internal control deficiencies3.3. Other communication with audit committeeOther communication with audit committee4.4. Management lettersManagement letters

Communicate with the Audit Communicate with the Audit Committee and ManagementCommittee and Management

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24 - 41©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

3. Other communication with audit 3. Other communication with audit committeecommittee

• ISA 260 Communication of audit with ISA 260 Communication of audit with those in charge of corporate governance.those in charge of corporate governance.• for large firms.for large firms.• frequent comm.frequent comm.• during initial engagement.during initial engagement.

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24 - 42©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

4.4. Management lettersManagement letters

• Provide added value opinion.Provide added value opinion.• optional.optional.• helps management to improve IC or helps management to improve IC or

business.business.• required when there is severe IC required when there is severe IC deficiencies.deficiencies.

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24 - 43©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Learning Objective 7Learning Objective 7

Identify the auditor’sIdentify the auditor’sresponsibilities when factsresponsibilities when factsaffecting the audit report areaffecting the audit report arediscovered after its issuance.discovered after its issuance.

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24 - 44©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Period Covered by Subsequent Period Covered by Subsequent Events ReviewEvents Review

Date clientDate clientissues financialissues financial

statementsstatements

3-26-073-26-07

Client’s endingClient’s endingbalance sheetbalance sheet

datedate

12-31-0612-31-06

Period to whichPeriod to whichreview forreview for

subsequentsubsequentevents appliesevents applies

Period forPeriod forprocessingprocessingthe financialthe financialstatementsstatements

AuditAuditreportreportdatedate

3-11-073-11-07

Period in whichPeriod in whichsubsequentsubsequentdiscovery ofdiscovery offacts is madefacts is made

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24 - 45©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Subsequent discovery of factsSubsequent discovery of facts

Regardless of auditors or mgts fault, the Regardless of auditors or mgts fault, the responsibility is the same:responsibility is the same:• Ask mgt to issue immediate revision of FS.Ask mgt to issue immediate revision of FS.• If time has passed, inform in the subsequent FS.If time has passed, inform in the subsequent FS.• Auditor must make sure client take necessary Auditor must make sure client take necessary

action.action.• If client refuse- auditor inform BOD or notify If client refuse- auditor inform BOD or notify regulatory agencies such as Bursa M or SC.regulatory agencies such as Bursa M or SC.• recalled of FS does arise from bus events recalled of FS does arise from bus events occurring after the date of the auditor’s report.occurring after the date of the auditor’s report.

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24 - 46©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

End of Chapter 24End of Chapter 24