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Chapter 11 Completing the Audit “It ain’t over till it’s over.” – Yogi Berra, former catcher for the New York Yankees McGraw-Hill/IrwinCopyright © 2008.

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Presentation on theme: "Chapter 11 Completing the Audit “It ain’t over till it’s over.” – Yogi Berra, former catcher for the New York Yankees McGraw-Hill/IrwinCopyright © 2008."— Presentation transcript:

1 Chapter 11 Completing the Audit “It ain’t over till it’s over.” – Yogi Berra, former catcher for the New York Yankees McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Considerations in Completing the Audit Roll-forward work Revenue and expense accounts Attorney letters Management representations Going-concern assessment Adjusting entries Subsequent events Audit documentation review Subsequent discovery of facts Omitted audit procedures Management letter Communications with those charged with governance 11-2

3 Major Activities in Audit BeginningEnd of Audit completionAudit report of yearyeardaterelease date Interim testing“Roll-forward” workSubsequent eventsSubsequent discovery of facts (tests of controlsRevenue and expenses(dual-dating)Omitted audit procedures and substantiveAttorney lettersManagement letter procedures)Management representationsCommunications with those Going-concern assessment charged with governance Adjusting entries Subsequent events Audit documentation review 11-3

4 Activities Between End of Year and Audit Completion Date Revenue and expense accounts Attorney letters Management representations Subsequent events Audit documentation review 11-4

5 Revenue and Expense Accounts Substantive procedures for related balance sheet accounts Analytical procedures Scan accounts for large and unusual entries Be aware of “miscellaneous,” “other,” and “clearing” accounts – “earnings management” 11-5

6 Activities Between End of Year and Audit Completion Date Revenue and expense accounts Attorney letters Management representations Subsequent events Audit documentation review 11-6

7 Procedures for Litigation, Claims, and Assessments Inquiry of clients Review minutes of meetings of stockholders, directors, and committees Review contracts, loan agreements, and correspondence from taxing and governmental agencies Obtain information concerning guarantees from bank confirmations Review documentation related to legal services 11-7

8 Attorney Letters: Responsibilities Auditors –Initiate request for attorney letter Client –Prepare listing, description, and evaluation of litigation, claims, and assessments for letter –Send letter to attorney including information related to litigation, claims, and assessments Attorney –Respond to auditors regarding client’s description of litigation, claims, and assessments contained in attorney letter 11-8

9 Attorney Letters: Contents Listing of pending litigation, claims, and assessments Description of each item or case included in the listing Evaluation of the likelihood of an unfavorable outcome Estimate of the range of potential loss Understanding regarding unasserted claims 11-9

10 Activities Between End of Year and Audit Completion Date Revenue and expense accounts Attorney letters Management representations Subsequent events Audit documentation review 11-10

11 Management Representations Provided by management to auditors Dated using audit completion date Broad purpose –Impress upon management its primary responsibility for the financial statements –May establish auditors’ defense if a question related to inquiries subsequently arises Qualify or disclaim an opinion if not provided by the client 11-11

12 Management Representations Required without regard to materiality: –Management responsibility for the fairness of the financial statements –Availability of all financial records and data –Management responsibility for design and implementation of programs and controls related to fraud –Disclosure of significant deficiencies in internal control –Information concerning fraud involving the client 11-12

13 Representations Related to I/C If subject to requirements of AS 5 –Management has performed as assessment of I/C –Management’s conclusion with respect to the operating effectiveness of its I/C –No subsequent changes in I/C that significantly affect I/C –No control deficiencies from prior engagements have not been properly resolved 11-13

14 Adjusting Journal Entries Accumulate proposed entries on “score sheet” Consider pre tax and after tax effects Require adjustment for all material entries Require adjustment for proposed entries totaling a material amount Require adjustment for “qualitatively material” entries Recommend adjustment for all other items 11-14

15 Evaluating Materiality Rollover method considers the current period income effect(s) of misstatements Iron curtain method considers the aggregate effect of the adjustments on the entity’s balance sheet SAB 108 requires adjustments to be proposed if material under either approach 11-15

16 Activities Between End of Year and Audit Completion Date Revenue and expense accounts Attorney letters Management representations Subsequent events Audit documentation review 11-16

17 Subsequent Period AuditAudit report BeginningEnd of completionrelease of yearyeardatedate Subsequent Period Audit Procedures Auditors perform procedures to evaluate events that may affect presentation and disclosure in the financial statements Events occurring during this period are known as subsequent events 11-17

18 Procedures in Subsequent Period Review latest interim financial statements Inquire of officers and other executives Read minutes of meetings of shareholders, directors, and committees Obtain responses to attorney letters Obtain management representations 11-18

19 Subsequent Events Type I –Provide new information about conditions existing at balance sheet date –Adjust financial statements to reflect new information Type II –Involve events occurring after balance sheet date –Disclose in financial statements –Prepare pro forma financial statements 11-19

20 When are Subsequent Events Identified? Prior to audit completion date –Perform audit procedures and ensure proper disclosure Following audit completion date but prior to audit report release date –Dual date audit report Following audit report release date –“Subsequent discovery of facts” 11-20

21 Activities Between End of Year and Audit Completion Date Revenue and expense accounts Attorney letters Management representations Subsequent events Audit documentation review 11-21

22 Audit Documentation Review Audit supervisor –Have all steps in audit program been performed? –Is referencing among documentation clear? –Are explanations understandable? Audit manager and partner –Is the overall scope of the audit adequate? –Do overall conclusions support the opinion? Reviewing partner –Are the quality of audit work and reporting consistent with quality standards of the firm? 11-22

23 Activities Following Audit Report Release Date Subsequent discovery of facts Omitted procedures Communication with audit committee (or those charged with governance) Management letters 11-23

24 Subsequent Discovery of Facts Require disclosure of events if: –Facts are reliable and existed at report date –Facts affect financial statements and auditors’ reports –Persons are continuing to rely on financial statements and auditors’ reports If client refuses disclosure, auditors should inform board that he or she will notify regulatory agencies and others relying on the reports 11-24

25 Omitted Procedures Perform procedures if: –Omitted procedures are important –Individuals are currently relying on financial statements and auditors’ reports If previous opinion can be supported, no further action necessary If previous opinion cannot be supported –Withdraw the original report –Issue revised reports –Inform persons currently relying on the financial statements 11-25

26 Communication with Individuals Charged with Governance Auditors’ responsibility under GAAS Overview of planned scope and timing of audit Judgment about quality of accounting policies, estimates, and disclosures Significant difficulties encountered during audit Uncorrected misstatements Disagreements with management Material, uncorrected misstatements Representations requested from management Management consultations with other auditors Significant issues discussed with management Other findings or issues significant and relevant to those charged with governance 11-26

27 Management Letters Not required under GAAS Are prepared as a by-product of procedures performed in audit Provide recommendations to client for improving effectiveness and efficiency of operations Delivered by auditors to client following audit engagement 11-27

28 Summary of Audit Communications 11-28


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