lecture 10 audit finalisation
TRANSCRIPT
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Completing and
Reporting the
Audit
Lecture 10
These slides are based on the resources provided with Arens, Elder, Shailer, Fiedler and Beasley,
(2010). "Essentials of Auditing, Assurance Services and Ethics in Australia", Pearson, Frenchs
Forest
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Learning objectives
1 Design and perform audit tests related to
presentation and disclosure audit objectives.
2 Conduct a review for contingent liabilities and
commitments.
3 Obtain and evaluate letters from clients lawyers.
4 Conduct a post-balance date review for subsequent
events.
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Learning objectives (Contd)
5 Design and perform the final steps in theevidence-accumulation segment of the audit.
6 Integrate the audit evidence gathered, andevaluate the overall audit results.
7 Communicate effectively with the auditcommittee and management.
8 Identify the auditors responsibilities when facts
affecting the audit report are discovered after itsissuance.
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Different audit opinions from
Chapter 2 An unmodified audit report contains an unqualifiedor
clean opinion.
All other reports are modified opinions.
A report can be an unqualified modified report when anemphasis of matteris added.
An emphasis of matter is used so that the reader can payappropriate attention to the issue raised, but does notchange the auditors opinion
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Different audit opinions (Contd)
Other modified reports are qualified (ASA 705). Aqualified opinion is given when there are reservationsabout the truth and fairness of the financialstatements.
Can include a qualified or except for opinion. This iswhen issue(s) are material but not pervasive.
Adverse opinionwould arise when financial report ismisstated and is material and pervasive.
Disclaimer of opinion would arise when there is aninability to obtain sufficient appropriate auditevidence and is material and pervasive.
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Summary of the audit: phase IV
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Additional presentation and disclosure
tests Examples of substantive procedures:
Review debt contracts to determine that accountsreceivable are pledged as collateral
Use a disclosure checklist to determine if thefinancial statements include all required disclosures
Review financial statements to determine if assetsare properly classified between current and non-
current categories Reconcile amounts included in the long-term debt
footnotes to information in the auditors workingpapers
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Reviewing for contingent liabilities
and commitments Contingent liability:
A potential future obligation to an outside party for an
unknown amount resulting from activities that have
already taken place but are conditional on some futureevent
Examples of considerable concern to the auditor:
Pending legal action
Income tax disputes Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances in letters of credit
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Reviewing for contingent liabilities and
commitments (Contd)
Commitments, e.g.:
To purchase raw materials; or
To lease facilities at a certain price
Agreements to sell merchandise at a fixed price
Procedures for finding contingencies, e.g.:
Inquire of management
Review ATO correspondence
Review minutes of meetings
Analyse legal expense
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Inquiries regarding litigation and claims
Lawyers representation letter:
Initiated by auditor
Prepared and sent by management
Sent direct to auditor
Some solicitors may be reluctant:
Lack of knowledge about matters
Refusal to disclose due to confidentiality
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Reviewing for subsequent events
Auditors responsibility for reviewing forsubsequent events is normally limited to the
period:Beginning with the balance sheet date; and
Ending with the date of the auditors report
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Types of subsequent events
Those events that have a direct effect on the financial
statements and require adjustment:
Provide additional information to management and
auditors to the valuation of account balances Require an adjustment of account balances if
amounts are material, e.g.:
Bankruptcy of a major debtor
Settlement of litigation at a different amount
Disposal of equipment below current book value
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Types of subsequent events (Contd)
Those events that have no direct effect on the financialstatements but for which disclosure is advisable: Provide evidence of conditions that didnt exist at
the date of the financial report but are so significant
that they require disclosure Ordinarily can be adequately disclosed in the notesto the financial report, e.g.: Decline in market value of securities Issuance of bonds or shares Decline in market value of inventory Uninsured loss of inventory from fire Merger or acquisition
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Audit tests for subsequent events
Inquiring of management
Corresponding with lawyers
Reviewing internal statements prepared subsequent
to the balance sheet date: Major changes in the business or environment
Reviewing records prepared subsequent to thebalance sheet date
Examining minutes issued subsequent to thebalance sheet date
Obtaining a letter of representation
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Final evidence accumulation
Performing final analytical procedures:
Final review for material misstatements
Evaluating going-concern assumption: Analytical procedures are important
Adverse opinion where highly improbable the
entity will continue as a going concern
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Final evidence accumulation (Contd)
Obtaining a management representation letter: To impress on management its responsibility
for the assertions in the financial report
To document the responses from managementto inquiries about various aspects of the audit
Reading other information accompanying thefinancial reports:
To ensure correspondence with information inthe financial statements
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Evaluating results
Sufficiency of evidence:
Reviewing the audit program
Evidence supports auditors opinion:
Summarising the misstatements uncovered
in the audit
Financial report disclosures:
Adequacy of financial statement disclosures
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Evaluating results (Contd)
Working paper review: To evaluate performance of inexperienced
personnel
To ensure the audit meets the public accounting
firms standard of performance
To counteract the bias that often enters into the
auditors judgement
Independent review: By a staff member with no experience on the
engagement
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Communicating with the audit
committee and management Communicate any irregularities:
Including fraud and other illegal acts
Communicate reportable internal controlstructure conditions
Communicate auditor independencerequirements
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Communicating with the audit
committee and management
(Contd)
Other communication with the audit committee, e.g.:
General approach and overall scope of the audit
Selection of, and changes to, significant accountingpolicies
Material audit adjustments
Management letter: To inform client management of the auditors
recommendations for improving the clientsbusiness
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Subsequent discovery of facts
After the auditor issues the audit report andcompletes all communication withmanagement and the audit committee:
The audit is finished
If the auditor becomes aware after the auditedfinancial statements have been issued thatsome information included in the statements ismaterially misleading:
The auditor is obliged to inform statementusers and may decide to re-issue the auditopinion unless the report is changed