1. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-1 COMPLETING THE AUDIT AND REPORTING RESPONSIBILITIES R&D : The Society of Accounting Education Email: info@soae.edu.pk Website: www.soae.edu.pkinfo@soae.edu.pkwww.soae.edu.pk

2. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-2 TOPICS COVERED Review for contingent liabilities. Commitments. Review for subsequent events. Finalizing the audit. Communications with the audit committee and management. Subsequent discovery of facts existing at the date of the auditor's report.

3. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-3 REVIEW FOR CONTINGENT LIABILITIES Contingent liabilities are defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that ultimately will be resolved when some future event occurs or fails to occur.

4. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-4 CICA 3290, CONTINGENCIES Likely. The chance of occurrence (or non- occurrence) of the future event(s) is high; Unlikely. The chance of occurrence (or non- occurrence) of future event(s) is slight; Not determinable. The chance of occurrence (or non-occurrence) of the future event(s) cannot be determined.

5. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-5 EXAMPLES OF CONTINGENT LIABILITIES Pending or threatened litigation. Actual or possible claims and assessments. Income tax disputes. Product warranties or defects. Guarantees of obligations to others. Agreements to repurchase receivables that have been sold.

6. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-6 NORMAL AUDIT PROCEDURES FOR IDENTIFYING CONTINGENT LIABILITIES Reading the minutes of board of directors and other committees of the board, and shareholders. Reviewing contracts (e.g., loan agreements and leases). Reviewing income tax liability, tax returns, and CCRA agents' reports. Confirming or otherwise documenting of guarantees and letters of credit obtained from financial institutions or other lending agencies. Inspecting other documents for possible guarantees.

7. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-7 SPECIFIC AUDIT PROCEDURES FOR IDENTIFYING CONTINGENT LIABILITIES Inquiry of and discussions with management about policies and procedures for identifying, evaluating, and accounting for contingent liabilities. Examination of documents in the entity's records such as correspondence and invoices from lawyers for pending or threatened lawsuits. Obtaining a legal letter. Obtaining a representation letter.

8. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-8 ENQUIRY LETTERS A letter (referred to as an enquiry letter) sent to the client's lawyers is the primary means of obtaining or corroborating information about litigation, claims, and assessments. An enquiry letter should be obtained from the entity's inside counsel if such a position exists.

9. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-9 TYPES OF LITIGATION Breach of contract Patent infringement Product liability

10. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-10 TYPES OF LITIGATION (cont.) Violations of legislation including: Securities laws. Anti-discrimination statues based on race, sex, age, and other characteristics. Anti-trust laws. Income tax regulations. Environmental protection laws.

11. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-11 COMMITMENTS Companies enter into long-term commitments to purchase raw materials or to sell their product at a fixed price. The main purposes for entering into such purchase or sales contracts is to obtain favorable pricing arrangements or to secure the availability of raw materials. Purchase Contract

12. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-12 REVIEW FOR SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements and auditor's report, that have a material effect on the financial statements.

13. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-13 TYPES OF SUBSEQUENT EVENTS Events that provide additional evidence about conditions that existed at the date of the balance sheet (Type I event). Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (Type II event).

14. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-14 EXAMPLES OF THE FIRST TYPE OF EVENT A loss of an uncollectible account receivable resulting from continued deterioration of its financial condition leading to bankruptcy after the balance sheet date. The settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year end financial statements.

15. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-15 EXAMPLES OF THE SECOND TYPE OF EVENT Purchase or disposal of a business. Sale of a capital stock or bond issue. Loss of a manufacturing facility or assets resulting from a casualty such as a fire or flood. Losses on receivables arising from conditions such as a casualty arising subsequent to the balance sheet date.

16. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-16 DUAL DATING For example, …February 25, 2002, except for Note 10, which is March 1, 2002. Limit auditor’s responsibility.

17. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-17 AUDIT PROCEDURES FOR SUBSEQUENT EVENTS Read any interim financial statements that are available for the period after year end. Examine the books of original entry for the subsequent events period. Ask management about subsequent events. Read the available minutes of meetings of board of directors and other committees.

18. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-18 AUDIT PROCEDURES FOR SUBSEQUENT EVENTS (cont.) Enquiry of client’s lawyers regarding claims and assessments. Obtain a representation letter from management.

19. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-19 FINALIZING THE AUDIT Perform final analytical procedures. Evaluate the entity's ability to continue as a going concern. Obtain a representation letter. Review working papers. Make final assessment of audit results. Evaluate financial statement presentation and disclosure. Obtain independent review of the engagement.

20. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-20 COMMUNICATIONS WITH THE AUDIT COMMITTEE The communication should address the following matters: The auditor's responsibility under GAAS. Significant accounting policies. Management judgments and accounting estimates. Significant audit adjustments. Disagreements with management. Consultation with other accountants. Major issues discussed with management before the auditor was retained. Difficulties encountered during the audit. Fraud involving senior management and fraud that causes material misstatements in the financial statements.

21. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-21 MANAGEMENT LETTER It is normal practice for the auditor to prepare what is referred to as a management letter. The general intent of a management letter is to make recommendations to the client based on observations made during the audit and may include areas such as organizational structure and efficiency issues.

22. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-22 SUBSEQUENT DISCOVERY OF FACTS EXISTING AT THE DATE OF THE AUDITOR'S REPORT An auditor has no obligation to make any inquiries or conduct any audit procedures after the financial statements and audit report have been issued. However, facts may come to the auditor's attention after the issuance of the financial statements which may indicate that the financial statements are in error and the audit report is affected.

23. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-23 SUBSEQUENT DISCOVERY OF FACTS If the client refuses to cooperate, the auditor should notify the board of directors and take the following steps: Notify the client that the auditor's report must no longer be associated with the financial statements. Notify any regulatory agencies having jurisdiction over the client that the auditor report can no longer be relied upon. Seek legal advice.

24. © 2002 McGraw-Hill Ryerson Limited. All rights reserved. 17-24 Thank you Research and Development of The Society of Accounting Education, Email: info@soae.edu.pk, Website: www.soae.edu.pkinfo@soae.edu.pk www.soae.edu.pk Overall supervised by Dr. Ansar Ali Noor