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Chapter 14 Completing the Audit.

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Presentation on theme: "Chapter 14 Completing the Audit."— Presentation transcript:

1 Chapter 14 Completing the Audit

2 Final Review of the Audit
Contingencies Collectibility of receivables and loans Product warranty liability Threat of exploration of assets in a foreign country Litigation, claims, and assessments Guarantees of debts of others Obligations of banks under standby letters of credit.

3 Final Review of the Audit
Contingencies (cont.) Agreements to repurchase receivables that have been sold Purchase and sale commitments. Responsibilities Related to Contingencies Sources of Evidence of Contingencies Letter of Audit Inquiry Effect of audit contingency on audit report.

4 Adequacy of Disclosure
Disclosure can be on the face of the financial statements Classifications Parenthetical notations Footnote Disclosures must be adequate

5 Management Representation Letter
Auditor should obtain at the end of the audit Management refusal is considered a scope limitation sufficient to preclude an unqualified opinion Purposes Reminds management of responsibility for the financial statements Confirms oral responses Reduces possibility of misunderstandings

6 Management Letter Letter from auditor to the management with constructive observations DO NOT CONFUSE WITH MANAGEMENT REPRESENTATION LETTER. Not required but seen as value-added auditing

7 Going Concern Auditors are required to evaluate likelihood of going concern. Evaluation made based on information obtained from normal audit procedures Indicators of problems Negative trends Internal matters External matters Other matters (bankruptcy prediction models)

8 Going Concern Review of Major Estimates
Mitigating Factors Effects on the financial statements Effects on the Audit Report Review of Major Estimates Responsible for providing reasonable assurance that Management has info system to develop estimates Estimates are reasonable Estimates presented in conformance with GAAP

9 Analytical and Quality Review
Revenue and expenses Final review stage adequacy of evidence unusual or unexpected balances adequacy of disclosure Internal Quality Review Process Concurring partner or cold review

10 Communicating with the Audit Committee
Processes for making sensitive estimates Significant audit adjustments Major accounting and reporting disagreements Management’s discussion with other CPA firms Difficulties encountered in performing the audit Significant fraud or other illegal acts Significant deficiencies in internal control Any independence issues

11 Subsequent Events Two types of events identified as subsequent
Type I conditions that existed at the balance sheet date Major company files bankruptcy Lawsuit settled for different than accrual Stock dividend or split Sale of inventor below carrying value

12 Subsequent Events II Type II subsequent events Uninsured casualty
Significant lawsuit Natural disaster Major decisions such as a merge Material change in value of investments

13 Subsequent Events Audit Procedures Read minutes of meetings
Read interim financial statements Inquire of management concerning significant changes in interim statements significant contingent liabilities significant changes in working capital, long term debt or owners equity status of tentative items unusual adjustments

14 Subsequent Events Procedures (cont)
Inquire of management and legal counsel concerning contingencies. Obtain Management Representation Letter

15 Subsequent Events Dual Dating
When an event occurs after the end of fieldwork but before issuance of the audit report there are two options. 1) use the date of event as date of report 2) Dual Date the report, use the dates of end of fieldwork and the event.

16 Subsequent Events Subsequent discovery of facts existing at the date of the auditor’s report Auditor must determine Reliability of new information Whether the event had occurred by the report date Whether users are likely to be relying on statements Whether the audit report would have been affected had the facts been known

17 Subsequent Events Subsequent discovery of facts existing at the date of the auditor’s report Actions Revise financial statements Explanation in subsequent statements If revising must notify users. Consideration of Omitted Procedures after the Report Date

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