1. [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, Philip Wallage, and Hans Gortemaker

2. [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.

3. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.3 ISQC 1 says The objective of the firm is to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and (b) Reports issued by the firm or engagement partners are appropriate in the circumstances.

4. [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  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, HR, engagement performance, and monitoring.  The firm’s chief executive officer (partners, board or equivalent) shall assume ultimate responsibility for the firm’s system of quality control.  The firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements.

5. [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.

6. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.6 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.

7. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.7 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

8. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.8 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.

9. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.9 Evaluate Governance Evidence The important governance information to be gathered from the client includes:  a legal letter,  a written representations by management (management representations letter)  information about contingent liabilities and commitments  identification of related parties.

10. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.10 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.

11. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.11 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.

12. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.12 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

13. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.13 Written Representations by Management A written statement by management is provided to the auditor to confirm certain matters or to support other audit evidence. The objectives of the auditor are: 1.To obtain written representations from management that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor 2.To support other audit evidence relevant to the financial statements

14. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.14 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.

15. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.15 Subsequent Events Subsequent events are events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.

16. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.16 Types of Events After the F/S Date Financial frameworks usually identify two types of events after the date of the financial statements:  Those that provide evidence of conditions that existed at the date of the financial statements (requires adjustment to the financial statements)  Those that provide evidence of conditions that arose after the date of the financial statements. (if material, requires disclosure).

17. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.17 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.

18. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.18 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)

19. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.19 Discovery Of Facts After The Financial Statements Have Been Issued.  After the financial statements have been issued the auditor has no obligation to perform any audit procedures 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.

20. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.20 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.

21. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.21 Review Financial Statements and Other Report Material Financial Statement Disclosures Disclosure ChecklistDisclosure Checklist Corporate Governance Disclosures Fair Values Other Information In The Annual Report

22. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.22 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.

23. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.23 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

24. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.24 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.

25. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.25 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.

26. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.26 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

27. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.27  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

28. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.28 $ 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

29. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.29 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.

30. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.30 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.

31. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.31 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.

32. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.32 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.

33. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.33 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.

34. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.34 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.

35. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.35 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

36. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 11.36 Thank You for Your Attention Any Questions?