1. Electronic Presentations in Microsoft ® PowerPoint ® Prepared by Brad MacDonald SIAST © 2009 McGraw-Hill Ryerson Limited

2. Learning Objectives Chapter Overview Chapter 15 Completing the Audit Tous droits réservés McGraw Hill Ryerson.

3. Learning Objectives Chapter Overview Slide 3 1.Describe the related balance sheet account groups that the major revenue and expense accounts are associated with, as well as the substantive analytical procedures applied to audit revenues and expenses. Learning Objectives 2.Outline the analytical procedures to be performed at the final stage of the audit, including analysis of income statement, financial statement presentation, and disclosures. Tous droits réservés McGraw Hill Ryerson.

4. Learning Objectives Chapter Overview Slide 4 3.Explain the purpose of lawyers’ letters and how they are used at the completion stage of an audit to identify any contingencies. 4.Explain why written management representations are obtained and what the items generally included in the representation letter are, including identification of related parties. 5.Given a set of facts and circumstances, classify a subsequent event by type and proper treatment in the financial statements, and outline the implications of the timing of discovery of the event for the auditor’s report. Learning Objectives Tous droits réservés McGraw Hill Ryerson.

5. Learning Objectives Chapter Overview Slide 5 6.Explain the final evaluation and conclusion stage of the audit: adjustments resulting from the audit, evaluation of evidence and misstatements to form the audit opinion, and reviews of working paper files. 7.Summarize the auditor’s communications throughout and at the conclusion of the engagement. Learning Objectives Tous droits réservés McGraw Hill Ryerson.

6. Learning Objectives Chapter Overview Slide 6 Audit of Revenue and Expense Overall Analytical Procedures Lawyers Letters to Detect Contingencies Management’s Written Representations Events Subsequent to the Balance Sheet Date Overall Evaluation of Evidence to Form the Audit Opinion Auditor Communications Chapter Overview Tous droits réservés McGraw Hill Ryerson.

7. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 7 Introduction This chapter covers completion of the financial statement audit. –Audit of the nominal or flow accounts cannot be completed until year end. –Audit of several year-end balances has been covered in auditing the accounting cycles. –Some procedures are particular to year end such as subsequent events, contingencies, presentations, and disclosures. Final wrap-up of the audit is also discussed. Tous droits réservés McGraw Hill Ryerson.

8. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 8 Audit of Revenue and Expense A number of the revenue and related topics were audited in whole or in part with other related account groups. –Working papers should show cross- reference indexing to the revenue and expense accounts in the trial balance. –Unaudited accounts will be evident. Tous droits réservés McGraw Hill Ryerson.

9. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 9 Revenue and Expense Assertions 1.Revenue accounts represent all the valid transactions recorded correctly in the proper account, amount, and period. 2.The accounting for consignments and goods sold with rights of return is in conformity with accounting principles. 3.Expense accounts represent all the valid expense transactions recorded correctly in the proper account, amount, and period 4.Revenues, expenses, cost of goods sold, and extraordinary, unusual or infrequent transactions are adequately classified and disclosed. Tous droits réservés McGraw Hill Ryerson.

10. Learning Objectives Chapter Overview Slide 10 Revenue Accounts Audited in Other Processes Revenue and Related TopicsRelated Account Group Sales and sales returnsReceivables Lease revenuesCapital assets and receivables Franchise revenueReceivables, intangibles Dividends and interestReceivables, investments Gain/loss on asset disposalsFixed assets, investments Rental revenueReceivables and investments Royalty and license revenueReceivables and investments Long-term sales commitmentsRevenue and receivables Product line reportingRevenue and receivables Accounting policy disclosureRevenues and receivables Tous droits réservés McGraw Hill Ryerson.

11. Learning Objectives Chapter Overview Slide 11 Expense Accounts Audited in Other Processes ExpenseRelated Account Group Purchases, cost of goodsInventories Inventory valuation lossesInventories Warranty and guarantee expense Inventories and liabilities Royalty and license expenseInventories Marketing and product R&DInvestments and intangibles Investment value lossesInvestments and intangibles Rental property expensesInvestments and intangibles Amortization of intangiblesInvestments and intangibles Bad debt expenseReceivables Tous droits réservés McGraw Hill Ryerson.

12. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 12 Expenses Some minor expense accounts like office supplies or utilities will not be covered until the end of the audit. –Auditors usually apply analytical procedures to these accounts. –All miscellaneous accounts and clearing accounts with debit balances are analyzed. –Accounts with income tax implications are also analyzed carefully. Tous droits réservés McGraw Hill Ryerson.

13. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 13 Overall Analytical Procedures Analytical procedures can be used at all points of the audit. –Techniques include: ratio analysis, comparison to prior years, and comparison to budgets. –Explanations for fluctuations are subject to audit. Tous droits réservés McGraw Hill Ryerson.

14. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 14 Analytical Procedures All “miscellaneous”, “other,” or “clearing” accounts with credit balances should be analyzed. –Identify each important transaction, and determine whether amounts are properly classified. –Miscellaneous accounts may contain accounting errors or incorrect classifications. Tous droits réservés McGraw Hill Ryerson.

15. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 15 Unusual Transactions Audit evidence and reporting problems can arise where management has created complicated transactions to manufacture earnings artificially. –Often, transactions are run through a series of subsidiaries, affiliates and related parties. –Bundled sales, particularly in the field of technology, also give rise to reporting concerns. Tous droits réservés McGraw Hill Ryerson.

16. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 16 A Sequence of Audit Events Interim audit work period (before year end): –Auditor evaluates internal control. –Auditor may begin work on testing controls. –Auditor can apply substantive procedures as at an interim date. Year-end work: –Complete the work on testing controls. –Complete work on audit of balances. –May take months after the actual year-end date to complete this work. Tous droits réservés McGraw Hill Ryerson.

17. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 17 Lawyer’s Letters to Detect Contingencies The procedures of obtaining a lawyer’s letter and a letter of representation are deferred to the last day of field work. –These representations are dated the last day of field work. Auditors are responsible for determining that all important events to the last day of field work are reflected in the statements. Tous droits réservés McGraw Hill Ryerson.

18. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 18 Communication with Auditee’s Lawyer Auditors are required to make certain inquiries designed to elicit specific information. –In a letter, the client requests the attorney to provide the auditor with information regarding contingencies, litigation, claims, and assessments. –In addition, other audit procedures would be designed to determine materially contingent liabilities. Tous droits réservés McGraw Hill Ryerson.

19. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 19 Management’s Written Representations The auditor should also direct questions to management regarding contingencies, litigation, claims, and assessments. –Other examinations and procedures may also lead the auditor to the discovery of contingencies. Tous droits réservés McGraw Hill Ryerson.

20. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 20 Client Representations Written client representations must be obtained on matters of audit importance. –The written representation is in the form of a letter on the client’s letterhead, addressed to the auditor, signed by responsible officers and dated as of the auditor’s reports. –Generally, it provides weak evidence. However, in some cases management representations are the only evidence available. Tous droits réservés McGraw Hill Ryerson.

21. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 21 Client Representations A number of items must be included in management’s representation letter. –Some items are included without limitation based on materiality. –Other items are included only if the amounts involved are material. –An extensive list of items and an example are produced in the text book. Tous droits réservés McGraw Hill Ryerson.

22. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 22 Audit of Related Party Transactions Auditors have a responsibility to obtain reasonable assurance that related parties have been identified, and disclosed in the financial statements. –Related parties exist when one party has the ability to exercise directly or indirectly, control, joint control, or significant influence over the other. –Make enquiries of management, review minutes, and watch for unusual transactions. Tous droits réservés McGraw Hill Ryerson.

23. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 23 Events Subsequent to the Balance Sheet Date Certain material events that occur after the balance sheet date, but before the end of the field work, require either an adjustment or disclosure. –Type I: adjustment of dollar amounts required –Type II: no adjustment of financial statements, but disclosure required Tous droits réservés McGraw Hill Ryerson.

24. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 24 Type 1: Adjustment of Dollar Amounts Required Subsequent event provides new information regarding a financial condition that exists at the balance sheet date. –Adjustment is required because the new information affects the financial statements. A loss on uncollectible trade accounts receivable as a result of bankruptcy of a major customer. The settlement of litigation for an amount different than estimated. Tous droits réservés McGraw Hill Ryerson.

25. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 25 Type II: No Adjustment, but Disclosure Required Subsequent events involve occurrences after the balance sheet date, but do not require adjustment of accounts at balance sheet date. –No adjustment as cause and manifestation arise after balance sheet date. –However, the event may require disclosure to keep financial statements from being misleading at the report date. Tous droits réservés McGraw Hill Ryerson.

26. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 26 Dual-Dating in the Audit Report Dual-dating refers to the dating of the audit report as the end of field work along with an additional later date attached to a Type II subsequent event. –This may occur where the subsequent information is discovered after completion of field work, but before issuance of the report. Not required if auditor is willing to extend subsequent procedures through later date. Tous droits réservés McGraw Hill Ryerson.

27. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 27 Audit Program for the Subsequent Period Some subsequent period audit procedures are part of a regular audit program. –Procedures are carried out for determining cutoff and proper valuation of balance as of balance sheet date. –Specific subsequent period audit procedures are designed to gather evidence on the two types of subsequent events. Tous droits réservés McGraw Hill Ryerson.

28. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 28 Responsibilities After the Audit Report Has Been Issued Two issues may arise after the audit report has been issued: subsequent discovery of facts existing at the date of the auditor’s report, and consideration of omitted procedures after the report date. –Auditors are not generally required to perform procedures after the report is issued. They do have responsibilities once they become aware of the facts or omitted procedures. Tous droits réservés McGraw Hill Ryerson.

29. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 29 Subsequent Discovery of Facts When an auditor learns of facts that are important after the audit report has been issued, the auditor must determine: –if the information is reliable, and –if these facts existed at the date of the report. Tous droits réservés McGraw Hill Ryerson.

30. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 30 Subsequent Discovery of Facts If both conditions are true and the auditor believes persons are relying on the report, the auditor must: withdraw the first report, issue a new report, and inform persons relying on the financial statements. –Exhibit 15-5 illustrates the exact sequence of steps. Tous droits réservés McGraw Hill Ryerson.

31. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 31 Overall Evaluation of Evidence to form an Opinion The financial statements, including note disclosure, are the responsibility of management. –Any adjustments uncovered in the audit will be presented to the auditee so that formal entries can be made to the accounting records. –Management is responsible for approving the wording of note disclosure. Tous droits réservés McGraw Hill Ryerson.

32. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 32 Overall Evaluation of Audit Evidence and Misstatements Audit tests provided a basis for deciding if unadjusted errors are material. –Unadjusted errors need to be aggregated in various ways to see if they total to a material amount. Tous droits réservés McGraw Hill Ryerson.

33. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 33 Working Paper and Report Review Working papers prepared by the audit staff will be reviewed by the audit supervisor in detail. –This is done to ensure that procedures are adequately documented. –The audit manager and audit partner will focus their review on the overall scope of the audit. Analytical procedures will be used as part of the overall review. –A second partner review is conducted as a quality assurance standard. Tous droits réservés McGraw Hill Ryerson.

34. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 34 Auditor Communications The interim and final work includes a number of different forms of audit correspondence. Exhibit 15-9 presents a summary of the various correspondence items. Tous droits réservés McGraw Hill Ryerson.

35. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 35 Summary of Audit Correspondence TypeFromToTime Engagement LetterAuditorClientBefore AcceptanceClientAuditorBefore Independence LetterAuditorClientInterim or after ConfirmationsClientOthersThroughout Lawyer’s LetterClient lawyer AuditorNear end Client Rep. LetterClientAuditorEnd Management LetterAuditorClientAfter Communication with audit committee AuditorDirectorsAll Tous droits réservés McGraw Hill Ryerson.

36. Learning Objectives Chapter Overview Learning objective 1 2 3 4 5 6 7 Slide 36 Communication with Audit Committees (or Equivalent) Auditor should review with management in advance information to be covered with the audit committee. –Communication with the audit committee can be either written or oral. –The auditor will communicate all matters affecting approval of annual financial statements with the board of directors. Tous droits réservés McGraw Hill Ryerson.