2. Part Six
COMPLETING THE AUDIT AND REPORTING RESPONSIBILITIES

3. CHAPTER 17 COMPLETING THE ENGAGEMENT

4. TOPICS COVERED Review for contingent liabilities. Commitments.
Subsequent events.
Final evidential evaluation processes.
Communications with the audit committee and management.
Subsequent discovery of facts existing at the date of the auditor's report.

5. 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.

6. SFAS NO. 5 - ACCOUNTING FOR CONTINGENCIES
Probable. The future event is likely to occur.
Reasonably possible. The chance of the future event occurring is more than remote but less than likely.
Remote. The chance of the future event occurring is slight.

7. 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.

8. AUDIT PROCEDURES FOR IDENTIFYING CONTINGENT LIABILITIES
Reading the minutes of board of directors and other committees of the board.
Reviewing contracts (e.g., loan agreements and leases).
Reviewing income tax liability, tax returns, and IRS 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.

9. 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 attorneys for pending or threatened lawsuits.
Obtaining of a legal letter.
Obtaining of a representation letter.

10. LEGAL LETTERS
A letter of audit inquiry (referred to as a legal letter) sent to the client's attorneys is the primary means of obtaining or corroborating information about litigation, claims, and assessments.
A legal letter should be obtained from the entity's inside counsel if such a position exists.

11. TYPES OF LITIGATION Breach of contract Patent infringement
Product liability

12. TYPES OF LITIGATION (continued)
Violations of governmental legislation including:
Securities laws, Antitrust.
Discrimination based on race, sex, age, and other characteristics.
Income tax.
Environmental protection.
Foreign Corrupt Practices Act.
Racketeer Influenced and Corrupt Organizations Act (RICO).

13. 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.

14. 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.

15. 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).

16. 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.

17. 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.

18. 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.

19. AUDIT PROCEDURES FOR SUBSEQUENT EVENTS (continued)
Inquiry of legal counsel concerning litigation, claims, and assessments.
Obtain a representation letter from management.

20. FINAL EVIDENTIAL EVALUATION PROCESSES
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.

21. PERFORM FINAL ANALYTICAL PROCEDURES
The objective of conducting analytical procedures at the end of the engagement is to assess the conclusions reached on the financial statement accounts.
Auditing standards require that analytical procedures be conducted as an overall review.

22. EVALUATE GOING CONCERN
Auditing standards state that the auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

23. STEPS IN THE GOING CONCERN EVALUATION
Step 1: Consider if the results of all audit procedures performed during the audit indicate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time (one year) (see Table 17-2).
Step 2: If there is substantial doubt, the auditor should obtain information about management's plans to mitigate the going concern problem and assess the likelihood that such plans can be implemented.

24. STEPS IN THE GOING CONCERN EVALUATION
Step 3: If the auditor concludes, after evaluating management's plans, that the entity has a going concern problem, he or she should consider the adequacy of the disclosures about the entity's ability to continue and include an explanatory paragraph in the audit report.

25. CONDITIONS OR EVENTS THAT MAY INDICATE GOING CONCERN PROBLEMS
Negative financial trends (see Table 17-3).
Other financial difficulties (see Table 17-4).
Internal problems (see Table 17-4).
External matters (see Table 17-4).

26. CONSIDERATION OF MANAGEMENT'S PLANS
Plans to dispose of assets.
Plans to borrow money or restructure debt.
Plans to reduce or delay expenditures.
Plans to increase ownership equity.

27. REPRESENTATION LETTER
Auditing standards require that the auditor obtain a representation letter from management (see Exhibit 17-3).
The representation letter is signed by the CEO and CFO.
Management’s refusal to provide a management letter constitutes a scope limitation.

28. WORKING PAPER REVIEW
All working paper should be reviewed by an audit team member senior to the person preparing the working papers.
The reviewer must ensure that
the audit was properly planned and supervised
the evidence supports the audit objectives tested
the evidence is sufficient for the type of audit report issued.

29. FINAL ASSESSMENT OF AUDIT RESULTS
The auditor must evaluate the results of the audit tests and be concerned with two issues:
the sufficiency of the audit evidence and
the effects of detected misstatements.

30. EVALUATE FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE
The auditor must ensure
that the financial statements comply with GAAP
that there is proper presentation of accounts
there is inclusion of all disclosures
Most CPA firms use some type of financial statement disclosure checklist.

31. INDEPENDENT PARTNER REVIEW
Most firm have a policy requiring that a concurring (or Second) partner review the financial statements for publicly traded companies and those financial statements that are expected to be widely distributed.

32. COMMUNICATIONS WITH THE AUDIT COMMITTEE
Auditing standards (AU 380) requires that the auditor communicate certain matters related to the conduct of the audit to those individuals responsible for oversight of the financial reporting process.

33. 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.
The auditor’s judgment about the quality of the entity's accounting principles.
Disagreements with management.
Consultation with other accountants.

34. COMMUNICATIONS WITH THE AUDIT COMMITTEE (continued)
The communication should address the following matters:
Major issues discussed with management prior to retention.
Difficulties encountered during the audit.
Fraud involving senior management or fraud that causes material misstatement of the financial statements.

35. 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.

36. 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.

37. 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.
Notify each person known to the auditor to be relying on the financial statements. Usually notification to a regulatory agency such as the SEC is the only practical way to provide appropriate disclosure.

38. CHAPTER 17 COMPLETING THE ENGAGEMENT