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Completing the Audit Chapter 16 Professor Juan M. Garcia.

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Presentation on theme: "Completing the Audit Chapter 16 Professor Juan M. Garcia."— Presentation transcript:

1 Completing the Audit Chapter 16 Professor Juan M. Garcia

2 Search for Unrecorded Liabilities Includes procedures performed through the last day of field work in order to identify or detect liabilities that existed at year end but were omitted from the financial statements. –Examining subsequent cash disbursements. –Examining pending receiving reports.

3 Review the Minutes of the Board of Directors Includes meetings held through the last day of field work. Objectives: –Identify unrecorded liabilities. –Determine possible dispositions. –Identify lawsuits or contingencies. –Detect subsequent events.

4 Perform Final Analytical Reviews To assist the auditors in assessing the validity of the conclusions reached, including the opinion to be issued. To identify areas that need to be examined further as well as provide a consideration of the adequacy of data gathered in response to unusual or unexpected relationships identified during the audit. A B C D Performance Price

5 Perform Procedures to Identify Loss Contingencies Types of contingencies: 1.Litigation 2.Income tax disputes 3.Environmental issues 4.Commitments 5.Guarantees 6.Accounts receivable sold or assigned

6 Perform Procedures to Identify Loss Contingencies Review the minutes of the board of directors. Send a letter of inquiry to client’s lawyer. Send confirmation letters to financial institutions to request information. Review reports from regulatory agencies for fines.

7 Subject to the foregoing and to the last paragraph of this letter we advise you that since January 1, 1997 we have not been engaged to give substantive attention to, or represent the Company in connection with material loss contingencies coming within the scope of clause (a) of Paragraph 5 of the Statement of Policy referred to in the last paragraph of this letter, except as follows: We are responding to an action which has been initiated against Apple Blossom Cologne Company alleging injury due to product liability. The action, Vila v. Apple Blossom Cologne Company, is not in litigation. Investigation, preparation, including development of the factual data and legal research and progress of the matter have reached a stage whereby a judgment can be made, taking all relevant factors into account that may affect the outcome. Although the litigation is being defended vigorously and the Company has meritorious defenses, we are of the opinion that the plaintiff will likely prevail in this action and it is extremely doubtful that the Company will prevail. As to the amount of potential loss, total costs and damages that might ultimately be assessed against the Company will be much less than the $75,000 damages claimed by the plaintiff. However, at this time the amount is not susceptible of reasonable estimation. (Continued)

8 Perform a Review of Subsequent Events Event or transaction that occurs after the date of the balance sheet but prior to the completion of the audit and issuance of the audit report. Two types: –Type 1. –Type 2.

9 Perform a Review of Subsequent Events – Type 1 Provides additional evidence as to conditions that existed at the balance sheet date and affects the estimates inherent in the process of preparing financial statements. This type requires that the financial statements amounts be adjusted to reflect the changes in estimates resulting from the additional evidence. Examples: 1.Litigation 2.Bankruptcies

10 Perform a Review of Subsequent Events – Type 2 Involves conditions coming into existence after the balance sheet date. These events do not require adjustment to the financial statements, but they should be disclosed if the financial statements otherwise be misleading. Examples: 1.Business combinations 2.New litigation 3.Early retirements of debt 4.Death of CEO

11 Perform a Review of Subsequent Events – Proc. Review the latest available interim financial statements and minutes of directors, stockholders, and appropriate committee meetings. Inquire about matters dealt with a meeting for which minutes are not available.

12 Perform a Review of Subsequent Events – Proc. Inquire of appropriate client officials as to loss contingencies. Obtain a letter from the client’s lawyer describing as of the last day of field work any pending litigation, unasserted claims, or other loss contingencies. Include in the rep. Letter a representation from the client concerning subsequent events,

13 Obtain Representation Letter Primary purpose is to have the client’s principal officers acknowledge that they are primarily responsible for the fairness of the financial statements. Summarizes the most important oral representations made by management.

14 Final Procedures Evaluating Audit Findings Known misstatements Projected misstatements Reviewing the engagement Client approval of adjusting entries and disclosures

15 Final Procedures Responsibilities of other information in the financial report Opinion formulation and report issuance Communication with the audit committee

16 Post-Audit Responsibilities The auditors’ subsequent discovery of facts existing at the date of their report. Subsequent discovery of omitted procedures.

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