Completing the Audit

Design and perform audit tests related to presentation and disclosure audit objectives.

Summary of the Audit Process Phase I Plan and design an audit approach. Phase II Perform tests of controls and substantive tests of transactions. Phase III Perform analytical procedures and tests of details of balances. Phase IV Complete the audit and issue an audit report.

Phase IV – Completing the Audit Review for contingent liabilities. Review for subsequent events. Accumulate final evidence. Evaluate results. Issue audit report. Communicate with audit committee and management.

Presentation and Disclosure Audit Objectives Occurrence and rights and obligations: Disclosed events and transactions have occurred and pertain to the entity. Completeness: All disclosures that should have been included in the financial statements have been included.

Conduct a review for contingent liabilities and commitments.

Contingent Liabilities A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place.

Likelihood of Occurrence and Financial Statement Treatment Reasonably possible Footnote disclosure is necessary Probable (likely to occur) Adjust financial statements or note disclosure depending on amounts involved Remote (slight chance) No disclosure is necessary Likelihood of Occurrence of Event Financial Statement Treatment

Auditor’s Concerns  Pending litigation for patent infringement, product liability, or other actions  Income tax disputes  Product warranties  Notes receivable discounted  Guarantees of obligations of others  Unused balances of outstanding letters of credit

Audit Procedures for Finding Contingencies Management Inquiry Review Revenue Agent Reports Review BOD Meeting Minutes Audit Procedures

Audit Procedures for Finding Contingencies Review legal invoices Examine Letters of Credit Obtain attorney letters re: litigation Audit Procedures Review Audit work papers for signs of contingencies

Obtain and evaluate letters from the client’s attorneys.

Inquiry of Client’s Attorneys A list including: (1) pending threatened litigation and (2) asserted or unasserted claims or assessments with which the attorney has had involvement. Request that the attorney furnish information or comment about the progress of each item listed.

Inquiry of Client’s Attorneys A request of the law firm to identify any unlisted pending or threatened legal actions or a statement that the client’s list is complete. A statement informing the attorney of the attorney’s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor.

Sarbanes-Oxley Act Congress included provisions in this act directing the SEC to issue rules requiring attorneys serving public companies to report material violations by the company of federal securities laws. The American Bar Association amended its attorney-client confidentiality rules to permit attorneys to breach confidentiality if a client is committing a crime or fraud.

Conduct a post-balance- sheet review for subsequent events.

Period Covered by Subsequent Events Review Client’s ending balance sheet date Date client issues financial statements Audit report date Period to which review for subsequent events applies Period for processing the financial statements

Types of Subsequent Events  Those that have a direct effect on the financial statements and require adjustment  Those that do not have a direct effect on the financial statements but for which disclosure is required

Requiring Adjustment  Declaration of bankruptcy by a customer with an accounts receivable balance  Settlement of a litigation at an amount different from the amount recorded on the books  Disposal of equipment not being used in operations at a price below the current book value  Sale of investments at a price below recorded cost

Advisability of Disclosure  Decline in the market value of securities held for temporary investment or resale  Issuance of bonds or equity securities  Decline in the market value of inventory as a consequence of government action barring further sale of a product  Uninsured loss of inventories as a result of fire  A merger or an acquisition

Audit Tests 1.Procedures normally integrated as a part of the verification of year-end account balances. 2.Procedures performed specifically for the purpose of discovering events or transactions that must be recognized as subsequent events. Two categories of audit procedures for the subsequent events review:

 Inquire of management  Correspond with attorneys  Review internal statements prepared subsequent to the balance sheet date  Review records prepared subsequent to the balance sheet date  Examine minutes issued subsequent to the balance sheet date  Obtain a letter of representation Audit Tests

Dual Dating  The first date is the date for the completion of field work except for a specific exception  The second date, which is always later, deals with the exception Example: An auditor returned to the client’s premises to perform audit tests pertaining only to the acquisition and completes those tests on March 31. The audit report will be dual-dated as follows: March 11, 2010, except for note 17, which is dated March 31, 2010.

Design and perform the final steps in the evidence- accumulation segment of the audit.

1.Perform final analytical procedures. 2.Evaluate the going concern assumption. 3.Obtain a management representation letter. 4.Consider information accompanying the basic financial statements. 5.Read other information in the annual report. Final Evidence Accumulation The five types of final evidence accumulation

Final Analytical Procedures Partner reads financial statements and footnotes Considers adequacy of evidence Unusual items not previously identified Unusual or unexpected balances or relationships

Going Concern Assumption Evaluate a client’s ability to continue operating another year Assess as part of initial planning Use analytical procedures & make final assessment Update based on audit results

Management Representation Letter 1.To impress upon management its responsibility for the assertions in the financial statements. 2.To remind management of potential misstatements or omissions in the financial statements. 3.To document the responses from management to inquiries about various aspects of the audit. Purposes of the letter:

Four Categories in Management Representation Letter Auditing standards suggest four categories of specific matters: Responsibility for financial statements Recognition, measurement, and disclosure Completeness of information Recording and disclosing subsequent events

Information Accompanying Basic Financial Statements Balance sheet Income statement Statement of cash flows Footnotes Detailed comparative statements Statistical data Schedule of insurance coverage Basic financial statements Standard auditor’s report Information accompanying basic financial statements Separate paragraph – unqualified, qualified, or disclaimer

Integrate the audit evidence gathered and evaluate the overall audit results.

Evaluate Results  Sufficient appropriate evidence  Evidence supports auditor’s opinion  Financial statement disclosures  Audit documentation review  Independent review  Summary of evidence evaluation

Evaluating Results and Reaching Conclusions

The audit report is the only thing that most users see in the audit process, and the consequences of issuing an inappropriate report can be severe. Issue the Audit Report

Communicate effectively with the audit committee and management.

 Communicate fraud and illegal acts  Communicate internal control deficiencies  Other communication with audit committee  Management letters Communicate with the Audit Committee and Management

Identify the auditor’s responsibilities when facts affecting the audit report are discovered after its issuance. discovered after its issuance.

Review for Subsequent Events and Discovery of Facts Date client issues financial statements Client’s ending balance sheet date Period to which review for subsequent events applies Period for processing the financial statements Audit report date Period in which subsequent discovery of facts is made