2. fall 2015auditing chapter 24 Completing the Audit 1

3. fall 2015auditing2 Jena describe what is meant by Interim Testing.

4. fall 2015auditing3 12/31/15 end of field work report date date report issued interim ABCD 3 date on balance sheet

5. fall 2015auditing4 12/31/15 end of field work report date interim ABCD 4 date report issued date on balance sheet

6. fall 2015auditing5 Contingent Liabilities / Attorney’s Letter Subsequent Events Management Representations analytical procedures Final assessment of audit risk - opinion communications to audit comm or mgmt AU-c 260 Communication with Those Charged with Governance AU-c 265 Communicating Internal Control Related Matters Identified in an Audit subsequent discovery of facts

7. fall 2015auditing examining subsequent payments to suppliers and other creditors to ensure that they were correctly recorded. almost $5 million of purchases applicable to Dec. 31 audit period that had not been included as liabilities. unrecorded liabilities 6

8. fall 2015auditing7 Contingent Liabilities / Losses A potential future payment to an outside party from an existing condition Uncertainty about the amount Outcome will be resolved by future events

9. fall 2015auditing8 Contingent Liabilities / Losses Lawsuits are an example of a contingency Income tax disputes Product warranties Guarantees of the debts of others

10. fall 2015auditing9 Katie what does SFAS No. 5 (ASC 450) teach us about contingent losses or contingent liabilities

11. fall 2015auditing10 SFAS 5 (ASC 450) contingencies probableestimable record loss probablenot estimable disclose reasonably possibleestimable or “ reasonably possiblenot estimable “ remote ignore ignore

12. fall 2015auditing11 SFAS 5 (ASC 450) contingencies estimable can’t be estimated Probableaccrue lossfn disclose Possiblefn disclose Remotedo nothing

13. fall 2015auditing12 Contingencies – lawsuits audit procedures Inquire of management Review minutes of BoD meetings Analyze legal expense Obtain a letter from each major attorney

14. fall 2015auditing13 Nicole Management is our primary source of information about Litigation, Claims and Assessments what is our most important source of evidence to corroborate managements’ representations regarding LCA ?

15. fall 2015auditing14 Inquiry of Client’s Attorney A list including (provided by client’s Senior Management) –Pending litigation –Asserted or unasserted claims Information about each item on list –Likelihood of an unfavorable outcome –Amount or range of potential loss A statement that the list is complete Page 348

16. fall 2015auditing15 “Inquiry of a Client’s Attorney” this is an auditing procedure Who sends this letter to the attorney ? To whom does their attorney respond ? Huyen

17. fall 2015auditing16 “Inquiry of a Client’s Attorney” what kind of problem do we have if their attorney refuses to respond ? what kind of report will we issue ? Romy

18. fall 2015auditing17 Do we modify the first paragraph? Do we modify the Management’s Responsibility paragraph? Do we modify the Auditor’s Responsibility paragraph? Do we modify the Opinion paragraph? Is there a Basis for Opinion paragraph? Before or after? Julissa

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21. fall 2015auditing20 12/31/15 end of field work report date interim ABCD 20 date report issued

22. fall 2015auditing21 Katina describe the two types of subsequent events how do we decide whether to make an adjusting entry to include the effects of the subsequent event in the financial statement balances or just disclose the event in the footnotes

23. fall 2015auditing22 subsequent events Type I - adjusting journal entry a.Those (subsequent events) that provide evidence of conditions that existed at the date of the financial statements Type II - disclose b. Those (subsequent events) that provide evidence of conditions that arose after the date of the financial statements

24. fall 2015auditing23 Type I - adjusting journal entry Declaration of bankruptcy by a customer with a large account receivable Settlement of litigation for an amount greater than recorded Sale of investments for less than recorded amount

25. fall 2015auditing24 Type II - disclosure Issue bonds or equity securities Merger or acquisition Loss due to fire or natural disaster

26. fall 2015auditing25 subsequent events – auditing procedures inquire of management read internal financial statements read minutes of Bd of Directors’ meetings obtain a letter of representation page 353

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28. fall 2015auditing27 AU-C Section 580* Written Representations Source: SAS No. 122. Effective for audits of financial statements for periods ending on or after December 15, 2012. Introduction Scope of This Section.01 This section addresses the auditor's responsibility to obtain written representations from management and, when appropriate, those charged with governance in an audit of financial statements..02 Exhibit D, "List ofAU-C Sections Containing Requirements for Written Representations," lists other AU-C sections containing subject matter-specific requirements for written representations. The specific requirements for written representations of other AU-C sections do not limit the application of this

29. fall 2015auditing28 Letter of representation Management is responsible for the financial statements Management believes the f/s conform to GAAP All financial records have been made available All minutes have been made available Information concerning fraud or illegal acts Information concerning related party transactions Unasserted claims that are probable have been disclosed Subsequent events Page 355

30. fall 2015auditing29 Julia Who prepares and signs the letter of client representations?

31. fall 2015auditing30 Christina we must obtain certain representations from management in writing what kind of problem do we have if the client refuses? what kind of report will we issue ?

32. fall 2015auditing31 Do we modify the first paragraph? Do we modify the Management’s Responsibility paragraph? Do we modify the Auditor’s Responsibility paragraph? Do we modify the Opinion paragraph? Is there a Basis for Opinion paragraph? Before or after? Gordon

33. fall 2015auditing32 Iris what is a “waived” or “passed” adjustment? on page 360 “unadjusted misstatement audit schedule” “summary of possible misstatements”

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35. fall 2015auditing Materiality page 122 34

36. fall 2015auditing35 Xiaodan at what three stages of the audit MAY we perform Analytical Procedures ? at what stages of the audit are we required to perform Analytical Procedures?

37. fall 2015auditing36 req’d planning phase substantive tests req’d at conclusion as an overall review

38. fall 2015auditing37 AU-C Section 520* Analytical Procedures Source: SAS No. 122. Effective for audits of financial statements for periods ending on or after December 15, 2012. Introduction Scope of This Section.01 This section addresses the auditor's use of analytical procedures as substantive procedures (substantive analytical procedures). It also addresses the auditor's responsibility to perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion on the financial statements. Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, addresses the use of analytical procedures as risk assessment procedures (which may be referred to as analytical procedures used to plan the audit).1 Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, addresses the nature, timing, and extent of audit procedures in response to assessed risks; these audit procedures may include substantive analytical procedures

39. fall 2015auditing38 12/31/15 end of field work report date interim ABCD 38 date report issued

40. fall 2015auditing39 Contingent Liabilities / Attorney’s Letter Subsequent Events Management Representations analytical procedures Final assessment of audit risk - opinion communications to audit comm or mgmt AU-c 260 Communication with Those Charged with Governance AU-c 265 Communicating Internal Control Related Matters Identified in an Audit subsequent discovery of facts

41. fall 2015auditing40 Jake M what is the definition of audit risk?

42. fall 2015auditing41

43. fall 2015auditing42.05 known misstatement from samples projected uncorrected misstatements 0 material

44. fall 2015auditing43 final review of workpapers all accounting and auditing questions have been resolved support the auditor’s opinion provide evidence the audit complied with GAAS means of coordinating and supervising the audit

45. fall 2015auditing44 Dillon who is an “independent reviewer?”

46. fall 2015auditing45 dual dating events that occur between the end of field work (the report date) and the date the report is issued extend field workor dual date page 353

47. fall 2015auditing46 dual dating p. 353 Hewlett-Packard has an October 31 year end Ernst & Young completed field work on November 13 th On Dec. 6, 2001, Hewlett-Packard made a $1 billion dollar debt offering, which it disclosed in Note 19 in its financial statements. This is how Ernst & Young dated its auditor’s report November 13, 2001, except for Note 19, as to which the date is December 6, 2001.

48. fall 2015auditing47 12/31/15 end of field work report date interim ABCD 47 date report issued

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51. fall 2015auditing50 communication with audit committees The auditor’s responsibilities An overview of the scope of the audit –Approach to address significant risks Corrected misstatements Accounting practices & estimates Difficulties & disagreements with management page 362

52. fall 2015auditing51 management letter

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54. fall 2015auditing53 AU-C Section 265* Communicating Internal Control Related Matters Identified in an Audit Source: SAS No. 122; SAS No. 125. Effective for audits of financial statements for periods ending on or after December 15, 2012. Introduction Scope of This Section.01 This section addresses the auditor's responsibility to appropriately communicate to those charged with governance and management deficiencies in internal control that the auditor has identified in an audit of financial statements. This section does not impose additional responsibilities on the auditor regarding obtaining an understanding of internal control or designing and performing tests of controls over and above the requirements of section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained. Section 260, The Auditor's Communication With Those Charged With Governance, establishes further requirements and provides guidance regarding the auditor's responsibility to communicate with those charged with governance regarding the audit.

55. fall 2015auditing54 Deficiency in internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A deficiency in design exists when (a)a control necessary to meet the control objective is missing, or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. Material weakness. A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. Significant deficiency. A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance.

56. fall 2015auditing55 Aleksandr what is the definition of control risk?

57. fall 2015auditing56 control risk the risk that a misstatement in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

58. fall 2015auditing57 Tim what is a material weakness?

59. fall 2015auditing58 material weakness (page 177 ) a significant deficiency in internal control such that there is a reasonable possibility that a material misstatement would not be prevented, or detected and corrected on a timely basis

60. fall 2015auditing59 Ian what two types of control deficiencies do we report ?

61. fall 2015auditing60 Janet to whom do we report deficiencies in the internal controls ?

62. fall 2015auditing61 communication of internal control matters communicate what –significant deficiency –material weaknesses communicate to who –the audit committee –board of directors –owners or senior management those charged with governance

63. fall 2015auditing62 12/31/14 end of field work report date interim ABCD 62 date report issued

64. fall 2015auditing63 Contingent Liabilities / Attorney’s Letter Subsequent Events Management Representations analytical procedures Final assessment of audit risk - opinion communications to audit comm or mgmt AU-c 260 Communication with Those Charged with Governance AU-c 265Communicating Internal Control Related Matters Identified in an Audit subsequent discovery of facts

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67. fall 2015auditing66 Fischer vs. Kletz, 266 F. Supp. 180 (SDNY 1967), the auditor did not disclose errors in a previously issued audit report when (s)he discovered the errors three months later during a consulting engagement an auditor has a duty to anyone still relying on his report to disclose subsequently discovered errors in the report

68. fall 2015auditing67 subsequent discovery of facts existing at the date of the audit report the auditor should a. discuss the matter with management and, when appropriate, those charged with governance. b. determine whether the financial statements need revision and, if so, inquire how management intends to address the matter in the financial statements.

69. fall 2015auditing68 subsequent discovery of facts existing at the date of the audit report.16 If management revises the financial statements, the auditor should a. apply the requirements of paragraph. b. if the audited financial statements have been made available to third parties, assess whether the steps taken …. ensure that anyone in receipt of those financial statements is informed of the situation,

70. fall 2015auditing69 subsequent discovery of facts existing at the date of the audit report.17 If management does not revise the financial statements in circumstances when the auditor believes they need to be revised, then a. if the audited financial statements have not been made available to third parties, the auditor should notify management and those charged with governance—unless all of those charged with governance are involved in managing the entity4—not to make the audited financial statements available to third parties before the necessary revisions have been made and a new auditor's report on the revised financial statements has been provided. If the audited financial statements are, nevertheless, subsequently made available to third parties without the necessary revisions, the auditor should apply the requirements of paragraph.17b. b. if the audited financial statements have been made available to third parties, the auditor should assess whether the steps taken by management are timely and appropriate to ensure that anyone in receipt of the audited financial statements is informed of the situation, including that the audited financial statements are not to be relied upon..18 If management does not take the necessary steps to ensure that anyone in receipt of the audited financial statements is informed of the situation, as provided by paragraphs.16b or.17b, the auditor should notify management and those charged with governance—u nless all of those charged with governance are involved in managing the entity5—that the auditor will seek to prevent future reliance on the auditor's report. If, despite such notification, management or those charged with governance do not take the necessary steps, the auditor should take appropriate action to seek to prevent reliance on the auditor's report. (Ref: par..A23–.A26)

71. fall 2015auditing70 subsequent discovery of facts existing at the date of the audit report

72. fall 2015auditing71 end of audit party

73. fall 2015auditing72 great quarter Because of You I enjoyed coming to “ work” every day

74. fall 2015auditing73 congratulations to our December 2015 grads

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