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Chapter 11 Completing the Audit It aint over till its over. – Yogi Berra, former catcher for the New York Yankees 11-2

Timeline for Major Activities in Audit Date of the auditors report (audit completion date) Beginning of year Year-End Date (date of the Financial Statements) Audit report release date Interim testing (tests of controls and substantive procedures Completing substantive procedures Attorneys letters Written representations Going-concern assessment Adjusting journal entries Audit documentation review Subsequent events Subsequently discovered facts Omitted audit procedures Management letter Communications with those charged with governance 11-3

Completing Substantive Procedures Roll-forward procedures: Extend work from interim period to date of the financial statements Perform analytical procedures to identify unusual or unexpected relationships not previously identified Review accounts for miscellaneous, other, and clearing accounts (may relate to earnings management) Evaluate management estimates and process for developing estimates for reasonableness 11-4

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 Attorneys letters 11-5

Attorneys Letters Contents of Attorneys Letter Responsibilities for Attorneys Letter 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 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 clients description of litigation, claims, and assessments contained in attorney letter 11-6

Written Representations Provided by management to auditors Dated using date of auditors reports (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 11-7

Contents of Written Representations Information related to financial statements –Managements responsibility for F/S and internal control over financial reporting –Appropriate disclosure, presentation, and reasonableness of items –Statement that uncorrected misstatements are immaterial Information provided to auditors by management Internal control over financial reporting (for public entities) 11-8

Other Procedures Performed Prior to Date of Auditors Report Consider whether evidence obtained during audit raises questions about ability to continue as a going concern Accumulate identified misstatements and evaluate need for adjustments to financial statements –Rollover method considers the current period income effect(s) of misstatements –Iron curtain method considers the aggregate effect of the adjustments on the entitys balance sheet Review of audit documentation –Supervisor: Have all steps been performed? –Manager and partner: Scope of audit and support for conclusions –Reviewing partner: Consistency of work and reporting with quality standards of the firm (engagement quality review) 11-9

Subsequent Events/ Subsequently Discovered Facts Date of the auditors report (audit completion date) Beginning of year Year-End Date (date of the financial statements) Audit report release date Subsequent Events Subsequently Discovered Facts Subsequent events occur between the date of the financial statements and date of the auditors report Subsequently discovered facts become known after the date of the auditors report 11-10

Procedures to Identify Subsequent Events Obtain understanding of procedures management performs to identify subsequent events Inquire of management and those charged with governance Read minutes of meetings of owners, management, and those charged with governance Review entitys interim financial statements 11-11

Auditors Response If discovered prior to date of auditors reports, perform procedures and evaluate disclosure If discovered prior to audit report release date, perform procedures –Revise date of auditors reports to reflect new completion date –Dual date auditors reports If discovered following audit report release date: If facts would result in revision of auditors report or F/S and individuals are relying on F/S –Notify individuals relying on F/S –Issue revised F/S which provide disclosure of facts 11-12

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 11-13

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 11-14

Summary of Audit Communications TypeFromToTimingMethod Engagement letterAuditorsClientBefore engagement Written Acceptance letterClientAuditorsBefore engagement Written Attorney letter response AttorneyAuditorsNear date of auditors report Written Written representations ClientAuditorsDate of auditors report Written 11-15

Summary of Audit Communications (Continued) TypeFromToTimingMethod Internal control deficiencies AuditorsIndividuals charged with governance For public entities, prior to audit report release date Written Communication with those charged with governance AuditorsIndividuals charged with governance After auditOral or written Management letter AuditorsClientAfter auditOral or written 11-16