[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.1 Completing the Audit Principles of Auditing: An Introduction to International Standards on Auditing - Ch. 11 Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.2 Objective: Complete the audit procedures and issue an opinion. Procedures (1)Evaluate governance evidence; (2)Perform procedures to identify subsequent events; (3)Review financial statements and other report material; (4)Perform wrap-up procedures; (5)Prepare Matters for Attention for Partners; (6)Report to the board of directors; (7)Prepare Audit report.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.3 Quality Control ISQC 1 says the audit firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partners are appropriate in the circumstances.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.4 Audit firm policies and procedures (a) General firm activities for which quality control policies and procedures are required include leadership responsibilities for quality within the firm, ethical requirements, acceptance and retention of clients, engagement performance, and monitoring. (b) The firm should set out criteria for determining the need for safeguards to reduce the familiarity threat to an acceptable level when using the same senior personnel on an assurance engagement over a long period of time; and (c) For all audits of financial statements of listed entities the rotation of the engagement partner after a specified period is required for compliance with the IFAC Code and national ethical requirements that are more restrictive.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.5 The work performed by each person in the audit team should be reviewed by personnel of at least equal competence to consider whether: The work has been performed in accordance with the audit program; The work performed and the results obtained have been adequately documented; All significant audit matters have been resolved or are reflected in audit conclusions; The objectives of the audit procedures have been achieved; and The conclusions expressed are consistent with the results of the work performed and support the audit opinion.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.6 Monitoring & Human Resources the firm should communicate the results of the monitoring including:  A description of the monitoring procedures performed.  The conclusions drawn.  significant deficiencies and the actions taken to resolve or amend those deficiencies.  Assign responsibility for each engagement to an engagement partner and staff with the appropriate capabilities, competence, authority and time to perform the role.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.7 Sarbanes-Oxley Act (SOx) The Sarbanes-Oxley Act (SOx) addresses overall review procedures required of the auditor such as second partner review, partner rotation, and quality control. It also discusses the client’s audit committee responsibilities and inspection by PCAOB. PCAOB conducts a program of inspections of audit firms to determine if they comply with professional standards and quality control.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.8 SOx requires every public accounting firm to use quality control policies relating to (i) monitoring of professional ethics and independence from entities on which the firm issues audit reports; (ii) consultation within the firm on accounting and auditing questions; (iii) supervision of audit work; (iv) hiring, professional development, and advancement of personnel; (v) the acceptance and continuation of audit engagements; (vi) internal inspection

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.9 SOx Company Audit Committee Ω Under SOx Sec 301 public company audit committees are directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by their company (including resolution of disagreements between management and the auditor regarding financial reporting). Ω Audit firm reports directly to the audit committee. Auditors may also have to discuss accounting complaints with the Audit Committee.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Evaluate Governance Evidence The important governance information to be gathered from the client includes:  a legal letter,  a management representations letter,  information about contingent liabilities and commitments,  identification of related parties.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Field Procedures to Obtain Evidence Concerning Claims Against Client  Read corporate meetings minutes  Read contracts, leases, correspondence and other certain documents  Review guarantees of indebtedness disclosed on bank confirmations  Inspect other documents for client guarantees  Determine if there are any side letters*  Agreements made outside the standard company contracts. These otherwise undisclosed agreements may be signed by senior officers, but not approved by the board of directors.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Legal letters- are the primary procedure auditors rely on for discovering litigation, claims and assessments that affect the client. Illustration 11.4  Legal letters are obtained from the clients legal counsel  Attorney Letter informs the auditor of pending litigation or other information involving legal counsel that is relevant to the financial statements.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Legal Letter The attorney letter should request evidence relating to:  Existence of conditions or circumstances indicating a possible loss from litigation, claims or assessments  The period in which the underlying cause occurred.  Likelihood of an unfavorable outcome  Amount of potential loss, including court costs

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide When management representations relate to matters that are material to the financial statements, the auditor must  seek corroborative audit evidence,  evaluate whether the representations made by management appear reasonable and consistent with other audit evidence;  consider whether the individuals making the representations are competent to do so.  request a management representations letter

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Is the written communication from the client’s management to the auditor formalizing statements that the client has made about matters that are pertinent to the audit and matters that are material to the financial statements. The Management Representations Letter (Illustration 11.5)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide  Management’s responsibility for the fair presentation of the financial statements.  Availability of all financial records and related data.  Information regarding related party transactions.  Plans or intentions that may affect the carrying value or classification of assets.  Disclosure of compensating balances and other arrangements involving restrictions on cash balances. Management Representations Letter Contains

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Review for Contingent Liabilities and Commitments Contingent liability is a potential future obligation to an outside party for an unknown amount resulting from the outcome of a past event. Commitments are agreements that the entity will hold to a fixed set of conditions, such as the purchase or sale of merchandise at a stated price, at a future date, regardless of what happens to profits or to the economy as a whole.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Audit procedures that test for contingencies are: H Reviews of contracts, correspondence and credit agreements H Inquiries of management. H Evaluation of known contingent liabilities. H Review of working papers. H Examination of letters of credit.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Related Parties Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operation decisions.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Two aspects of related party transactions of which an auditor must be aware are: 1. Adequate disclosure of related party transactions. 2. The possibility that the existence of related parties increases the risk of management fraud.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide The auditor shall perform the following risk assessment procedures specifically directed towards identifying related party relationships and transactions not identified or disclosed by management  Inquire of management and others within the entity about the existence of transactions that are both significant and non-routine  Where a party appears to actively exert dominant influence over the entity, perform procedures intended to identify the parties to which the dominant party is related  Review appropriate records or documents for transactions that are both significant and non- routine including Bank and legal confirmations obtained by the auditor; and Minutes of meetings of shareholders and those charged with governance, and other relevant statutory records.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide alert for material related party transactions H review minutes of the meetings of shareholders and the board of directors and other relevant statutory records such as the register of directors’ interests; H inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties; and H review the entity’s income tax returns and other information supplied to the regulatory agencies.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Review for Discovery of Subsequent Events Subsequent events are transactions and other pertinent events that occurred after the balance sheet date and which have material affect on the fair presentation or disclosure of the statements being audited. Review for subsequent events are the auditing procedures performed by auditors to identify and evaluate subsequent events.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Types of Events After the Balance Sheet Date IAS 10 identifies two types of events after the balance sheet date: ½events that provide further evidence of conditions that existed at period end (requires adjustment to the financial statements) ½events that are indicative of conditions that arose subsequent to period end (if material, requires disclosure).

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Events Up To The Date Of The Auditor's Report. The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements have been identified.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Procedures to Identify Events That May Require Adjustment of, or Disclosure in, The Financial Statements HReview Management Procedures. HRead the entity’s minutes of the meetings held after period end. HRead the latest available F.S. & other related Mgmt. Reports HInquire of the entity’s lawyers concerning litigation and claims. HInquire of Mgmt. whether any subsequent events have occurred that might affect the F.S.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Events Between The Auditor’s Report Date And The Issuance Of The Statements. The auditor has no responsibility to perform procedures or make any inquiry regarding the financial statements after the date of the auditor’s report.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Events Between the Balance Sheet Date and the Issuance of the Statements HWhen management amends the financial statements HThe auditor reviews for subsequent events HIssue or Reissue New Audit Report HWhen management does not amend the financial statements HQualified Opinion or an Adverse Opinion (before report was released) is given HNotify the top management not to use the F.S. & auditor’s report. (after report was released)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Discovery Of Facts After The Financial Statements Have Been Issued.  After the financial statements have been issued the auditor has no obligation to make any inquiry regarding such financial statements.  If, however, the auditor becomes aware of a fact which existed at the date of the auditor’s report, revision of the financial statements and audit report should be considered.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Review Financial Statements and Other Report Material  The final review of the financial statements involves procedures to determine if disclosures of financial statements and other required disclosures (for corporate governance, management reports, etc.) are adequate.  Adequate disclosure includes consideration of all the financial statements, including related footnotes.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Review Financial Statements and Other Report Material Financial Statement Disclosures Corporate Governance Disclosures Other Information In The Annual Report

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Financial Statement Disclosures Disclosures Footnotes Disclosure Checklist Fair Values

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Corporate Governance The London Stock Exchange Code of Best Practice state that: The directors should report on the effectiveness of the company's system of internal control and that the business is a going concern, with supporting assumptions or qualifications as necessary. Under the Sarbanes-Oxley Act (SOx) auditors have responsibility considering certain governance disclosures connected with the financial statements. –The company must disclose whether or not, and if not, the reason why, it has adopted a code of ethics. –SOx Section 407 requires company disclosure of whether or not, and if not, the reasons, their audit committee is comprised of at least one member who is a financial expert.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Other Information In Annual Reports ‘The auditor should read the other information (in documents containing audited financial statements) to identify material inconsistencies with the audited financial statements’. ISA 720 Says

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Other information, on which the auditor may have to report, includes -an annual report, -a report by management or the board of directors on operations -financial summary or highlights, -employment data, -planned capital expenditures, -financial ratios -names of officers and directors, -selected quarterly data -documents used in securities offerings.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Wrap-Up Procedures Wrap-up procedures are those procedures done at the end of an audit that generally cannot be performed before the other audit work is complete. They include supervisory review, final analytical procedures, working capital review, evaluating audit findings for material misstatements, review of laws and regulation, and evaluation of going concern.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Supervisory Review Review starts with the in-charge (senior) accountant reviewing the work of the staff accountant The manager and partner in charge of the audit review the work submitted by the in-charge accountant For larger audits, there is an additional review of the engagement is performed by a manager or partner not working on the engagement In auditing firms with multiple offices, it is common practice for review teams to visit the various offices periodically and review selected engagements

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide  Working papers (or ‘work papers’) are a record of the auditor’s planning; nature, timing and extent of the auditing procedures performed; results of such procedures and the conclusions drawn from the evidence obtained.  Two functions:  Aid in conduct in supervision of audit.  Support for auditor’s opinion, especially representation. Working Paper Review

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide $ When the audit tests for each item in the financial statements are completed, the staff auditor doing the work will sign off completion of steps, identify monetary misstatements in the financial statements, and propose adjustment to the financial statements. $ Monetary misstatement are misstatement that cause a distortion of financial statement. $ Results from mistakes in processing transactions, mistakes in selection of accounting principles, and mistakes in facts or judgment about accounting estimates. Evaluating Audit Findings For Material Misstatements

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Review Laws and Regulation The auditor should: –know the laws that apply to their client, –review the criteria required to comply with that statute, –test for the client company’s compliance.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Going Concern éThe going concern assumption is that the enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. éAn entity's continuance as a going concern is assumed in the preparation of the financial statements in the absence of information to the contrary. éFor example, assets and liabilities are recorded on the basis the entity will be around long enough to pay the liabilities and fully depreciate the assets.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Procedures if Going Concern Doubt If there is significant doubt of the entity’s ability to continue as a going concern, the auditor should –Review management’s plans for future actions based on its going concern assessment; –Seek written representations from management regarding its plans for future action; and –Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Matters For Attention Of Partners (MAPs) Matters for Attention of Partners (MAPs) is a report by audit managers to be reviewed by the partner or director detailing the audit decisions reached by managers or partners and the reasons for those decisions.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Items included in the MAP: 'a cover page signed by audit manager and partners stating the basic conclusions of the audit 'general matters, management comments, comments on results 'discussions of accounts that required special consideration 'compliance with statutory laws, ISAs and IASs 'comments on accounting systems 'comments on management letters 'discussion of any matters that were outstanding at that date.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Reports to The Board of Directors 2The Board of Directors has significant influence over accounting and financial policies of the entity. The auditor must communicate their important findings to the Board. –Board has responsibility for hiring independent auditor. 2Typical areas of discussion in the Long-Form report to the board of directors is information which the client has omitted from its notes and the errors the auditor has found in performing his work.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide SEC requires auditors to report to the audit committee of the publicly traded company –all critical accounting policies and practices to be used; –all alternative treatments of financial information within generally accepted accounting principles that have been discussed; and –other material written communications such as any management letter or schedule of unadjusted differences. SEC Report to Audit Committee

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide Thank You for Your Attention Any Questions?