Chapter 11 Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons Completing the Integrated Audit and Reporting
Learning Objectives 1. Learn the various topics and steps addressed in the final phase of an integrated audit, including the integrated nature of the various procedures and their impacts on both the ICFR and financial statement audits. 2. Identify the circumstances in which unqualified and other audit reports are appropriate for ICFR and financial statement audits. 3. Recognize the content and language of audit reports, including the different forms used for different situations. Chapter 11-1
FINAL AUDIT PROCEDURES Learning Objective #1Chapter 11 -2 Wrap-up audit procedures include the following: Audit of unusual year-end transactions Audit of contingent liabilities and commitments Inquiry of a client’s lawyer Obtaining management’s written representations Subsequent events review Going concern evaluation Consideration of other published information Auditing other financial statements and financial statement disclosures (continued)
FINAL AUDIT PROCEDURES Learning Objective #1Chapter 11 -3 Wrap-up audit procedures include the following (continued): Communications Final review Review of audit documentation Engagement quality review
Overview of an Integrated Audit Chapter 11 -4Learning Objective #1 EXHIBIT 11-1
Unusual Year-End Transactions Chapter 11 -5Learning Objective #1 Unusual year-end transactions receive particular attention during final audit steps Unusual year-end transactions receive significant auditor scrutiny because of the risk that they have no real business purpose. One possibility is that unusual year-end transactions are recorded only because management wants to alter the financial results presented in the financial statements
Contingent Liabilities and Commitments Chapter 11 -6Learning Objective #1 A contingent liability is a payment or future use of assets for which a company may become obligated as a result of conditions existing at the current time The audit procedures are intended to determine whether the auditor is aware of all contingent liabilities. Commitments are agreements a company has for future actions, such as to purchase inventory or execute leases.
Inquiry of a Client’s Lawyer Learning Objective #1Chapter 11-7 Auditing standards provide guidance for inquiry of an audit client’s outside legal counsel regarding “litigation, claims, and assessments” (AU 337). The auditor is responsible for obtaining audit evidence about The existence of litigation, claims, and assessments The period in which the causal event occurred The probability of an outcome resulting in a liability An estimate of the possible loss
Content of a Letter of Inquiry to a Client’s Lawyer Chapter 11 -9Learning Objective #1 EXHIBIT 11-3
Sample Attorney’s Letter Chapter 11 -10Learning Objective #1
Sample of Financial Statement Audit Written Representations (Part 1) Learning Objective #1Chapter 11 - 11
Sample of Financial Statement Audit Written Representations (Part 2) Learning Objective #1Chapter 11 - 12
Financial Statement Audit Written Representations (Part 2) Learning Objective #1Chapter 11 - 13 A scope limitation exists if the auditor is unable to obtain a written management representations letter for any reason, including a refusal on the part of management. If the auditor is not able to obtain written management representations for an integrated audit, the only options are to: 1. issue a report indicating that an opinion cannot be provided, or 2. withdraw from the engagement.
Learning Objective #1Chapter 11-14 Management’s Representations for an ICFR Audit EXHIBIT 11-4
Management’s Representations in a Financial Statement Audit Learning Objective #1 Chapter 11-15 EXHIBIT 11-5
Management’s Representations in a Financial Statement Audit Learning Objective #1 Chapter 11-16 EXHIBIT 11-5
Subsequent Events Review Learning Objective #1 Chapter 11-17 Discovering information after year end that is relevant to the prior year’s financial statements or changes in ICFR is learning of a subsequent event. The first type of subsequent event refers to more information surfacing about an event that occurred during the fiscal year being audited on a condition that existed as of the balance sheet date. This is called a recognized or Type I subsequent event.
Subsequent Events Review Learning Objective #1 Chapter 11-18 The second type of subsequent event is one that occurs after the financial statement date but before the date of the audit report. This is called a nonrecognized or Type II subsequent event. Examples of these types of subsequent events are: 1. Sale of a bond or capital stock issue 2. Purchase of a business 3. Settlement of litigation when the event giving rise to the claim took place subsequent to the balance sheet date 4. Loss of plant or inventories as a result of fire or flood
Going Concern Learning Objective #1 Chapter 11-22 The auditor must evaluate whether an audit client will continue as a going concern for a reasonable period of time. The audit standards define the time period as not longer than one year after the financial statement date.
Other Published Information Learning Objective #1 Chapter 11-23 Various audit steps may be appropriate if a company produces financial information other than or in addition to the basic financial statements. If the material inconsistency reflects a problem with the other information, the auditor asks the client to revise the other information. The auditor often uses a checklist to verify that all the disclosure requirements are met.
Review of Audit Documentation Learning Objective #1 Chapter 11-30 AS 3 requires that the auditor prepare an engagement completion document. This document includes all the information needed for a reviewer to understand the significant findings or issues of the audit AS 3 also provides guidance regarding the completion date for audit documentation. All audit procedures must be complete, and necessary evidence must be obtained before the audit report date. the auditor has a limited additional period of time, 45 days, to finalize the audit documentation for retention. The end of the 45-day time period is called the documentation completion date.
Engagement Quality Review Learning Objective #1 Chapter 11-32 SOX Section 103 and AS 7 require that audits of public companies include a review by a concurring or second partner who is not in charge of the audit engagement. This independent review is referred to as an engagement quality review.
REPORTING Learning Objective #2 Chapter 11-33 Whenever an auditor is associated with financial statements, a report needs to be issued. The audit report date is “no earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the auditor’s opinion” (AS 5.89). When new information is learned after the financial statements are released, the auditor first considers whether the new information is important to anyone still using the financial statements and audit report.
Information Discovered between the Audit Completion and Financial Statement Release Dates Learning Objective #2Chapter 11-34 EXHIBIT 11-12
Events and Information after the Fiscal Year End Learning Objective #2Chapter 11-35 EXHIBIT 11-13
Reissuing an Audit Report Learning Objective #2Chapter 11-36 A special reporting situation relates to an auditor reissuing an audit report on a prior year’s financial statements. If the predecessor auditor does not reissue the audit report for the prior year’s financial statements, a public company has no choice other than having the current auditor re-audit the prior year.
REPORTING ON THE AUDIT OF THE FINANCIAL STATEMENTS Learning Objective #3Chapter 11-37 The elements of a report expressing an opinion on the financial statements of a public company are a. A title that includes the word independent b. A statement that the financial statements identified in the report were audited c. A statement that the financial statements are the responsibility of the Company’s management and that the auditor’s responsibility is to express an opinion on the financial statements based on his or her audit d. A statement that the audit was conducted in accordance with standards of the Public Company Accounting Oversight Board and an identification of the United States of America as the country of origin of those standards (continued)
REPORTING ON THE AUDIT OF THE FINANCIAL STATEMENTS Learning Objective #3Chapter 11-38 The elements of a report expressing an opinion on the financial statements of a public company are (continued) e. A statement that those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement f. A statement that an audit includes 1. Examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements 2. Assessing the accounting principles used and significant estimates made by management 3. Evaluating the overall financial statement presentation
REPORTING ON THE AUDIT OF THE FINANCIAL STATEMENTS Learning Objective #3Chapter 11-39 The elements of a report expressing an opinion on the financial statements of a public company are (continued) g. A statement that the auditor believes that his or her audit provides a reasonable basis for his or her opinion h. An opinion as to whether the financial statements present fairly, in all material respects, the financial position of the Company as of the balance sheet date, etc. i. The manual or printed signature of the auditor’s firm j. The date of the audit report An unqualified financial statement audit report is often referred to as a standard report or clean opinion.
Unqualified Report on the Audit of the Financial Statements of a Public Company Learning Objective #3Chapter 11-40
FINANCIAL STATEMENT AUDIT REPORTS THAT DIFFER FROM UNQUALIFIED, STANDARD REPORTS Learning Objective #3Chapter 11-41 1. The auditor may need to add explanatory language to the report 2. The audit report can also state a qualified opinion. A qualified opinion report is used when the financial statements are fair “except for” some matter that is specified in the report 3. An audit report can express an adverse opinion on the financial statements. An adverse opinion report states that the financial statements “do not present fairly” the financial position, results of operations, or cash flows of the company. 4. An auditor can issue a report on the financial statements that disclaims an opinion.
Opinion Based in Part on the Report of Another Auditor Learning Objective #3Chapter 11-42
Substantial Doubt about an Entity’s Ability to Continue as a Going Concern Learning Objective #3Chapter 11-43
Consistency: Change in Accounting Principle Learning Objective #3Chapter 11-44
Qualified, Adverse, and Disclaimer Financial Statement Audit Reports Learning Objective #3Chapter 11-47 When the financial statements do not present the company’s financial situation and events fairly, the audit report expresses either a qualified or an adverse opinion. A qualified opinion states that, except for the effects of the matter to which the qualification relates, the financial statements present fairly, in all material respects, financial position, results of operations, and cash flows in conformity with GAAP. An adverse opinion is appropriate when the problem is so pervasive that it prevents the financial statements, as a whole, from being fairly stated.
Qualified Opinion for a Departure from Generally Accepted Accounting Principles Learning Objective #3Chapter 11-48
Qualified Financial Statement Audit Opinion Because of a Scope Limitation Learning Objective #3 Chapter 11-49
Disclaimer of Opinion Learning Objective #3 Chapter 11-51
REPORTING ON AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL REPORTING Learning Objective #3 Chapter 11-52 EXHIBIT 11-15
Audit Reports on ICFR that are not Unqualified Learning Objective #3 Chapter 11-53 An adverse opinion report on ICFR includes the following: The definition of a material weakness A statement that a material weakness has been identified Identification of the material weakness Either a statement that the material weakness is included in management’s assessment, or that management’s assessment does not include a description of the material weakness If the material weakness is not included in management’s assessment, a description of the material weakness with specific information about its nature, and its actual and potential effect on the financial statements If the material weakness is included in management’s assessment but is not fairly presented, a statement that this is the case and a description of the material weakness
Review Question Chapter 11-54 PCAOB AS 3, Audit Documentation establishes a cutoff after which nothing can be removed from the audit work papers. The cutoff is the (a) company’s fiscal year end. (b) field work date. (c) document completion date. (d) SEC filing date.
Review Question Chapter 11-55 To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by (a) a staff-level member of the audit team. (b) a staff-level member of another audit team. (c) a manager or partner with knowledge and understanding of the client’s business and industry. (d) the individual who has responsibility for the firm’s peer review program
Review Question Chapter 11-56 Analytical procedures used during an audit’s final review include: (a) identifying accounts that have not changed from the prior year and collecting evidence on them. (b) retesting control procedures that were concluded to lack operating effectiveness during tests of controls. (c) evaluating account balances that differ from expected amounts. (d) performing additional substantive tests on quantitatively large financial statement amounts.