Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill...

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Chapter 17 Completing the Audit Engagement McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Transcript of Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill...

Page 1: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 17

Completing the Audit

Engagement

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Review for Contingent LiabilitiesA contingent liability is defined as an existing condition, situation, or set of circumstances

involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future

event occurs or fails to occur.

A contingent liability is defined as an existing condition, situation, or set of circumstances

involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future

event occurs or fails to occur.

Probable: The future event is likely to occur.

Reasonably Possible: The chances of the future event occurring is more than remote but less than probable.

Remote: The chance of the future event occurring is slight.

Probable: The future event is likely to occur.

Reasonably Possible: The chances of the future event occurring is more than remote but less than probable.

Remote: The chance of the future event occurring is slight.

Examples

• 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

Examples

• 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

LO# 1

17-2

Page 3: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Audit Procedures for Identifying Contingent Liabilities

Read minutes of meetings of the board of directors, committees of the board,

and stockholders.

Review contracts, loan agreements, leases, and

correspondence from government agencies.

Confirm or otherwise document guarantees and

letters of credit.

Inspect other documents for possible guarantees or

other similar arrangements.

Review tax returns, IRS reports, and schedules supporting the client’s

income tax liability.

LO# 2

17-3

Page 4: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Audit Procedures for Identifying Contingent Liabilities

Inquire and discuss with management about its policies and

procedures for identifying, evaluating, and accounting for

contingent liabilities.

Examine documents in the entity’s records such as correspondence and invoices from attorneys for pending or threatened lawsuits.

Obtain a legal letter that describes and evaluates any litigation, claims,

or assessments.

Obtain written representation from management that all litigation,

asserted and unasserted claims, and assessments have been

disclosed in accordance with FASB ASC Topic 450.

Specific Audit Procedures Conducted Near Completion of Audit

LO# 2

17-4

Page 5: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Legal LettersA letter of audit inquiry (legal letter) sent to the

client’s attorneys is the primary means of obtaining or corroborating information about

litigation, claims, and assessments.

LO# 3

17-5

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Example of Legal LetterLO# 3

17-6

Page 7: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Commitments

Long-term commitments are usually identified through inquiry of client personnel during the audit of the revenue and purchasing processes.

In most cases, such commitments are disclosed in a footnote to the financial statements.

Long-term contracts to purchase raw materials or sell their products at a fixed price

Long-term contracts to purchase raw materials or sell their products at a fixed price

To obtain a favorable pricing arrangement

To obtain a favorable pricing arrangement

To secure the availability of raw

materials

To secure the availability of raw

materials

LO# 4

17-7

Page 8: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Review of Subsequent Events for Audit of Financial Statements Figure 17-1

LO# 5

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Page 9: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Review for Subsequent Events for Audit of Financial Statements

Balance Sheet Date

Type I Event

Conditions existed before the balance

sheet date and affect estimates that are part of financial statements

Type II Event

Conditions did not exist at the balance

sheet date and do not affect the accuracy of

the financial statements

Require adjustment of the financial statements

Require disclosure and possibly pro forma

financial statements

LO# 5

17-9

Page 10: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Dual DatingWhen a subsequent event is recorded or disclosed

in the financial statements after sufficient, appropriate audit evidence has been obtained

but before the issuance of the financial statements, the auditor considers the following

options for dating of the auditor’s report:

(1) “Dual date” the report (original date of report plus date of subsequent event—limits liability)

(2) Change the date of the auditor’s report to the date of the subsequent event—extends liability

LO# 6

17-10

Page 11: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Audit Procedures to Look for Subsequent Events

Inquire of Management

Read Interim Financial

StatementsExamine the

Books of Original Entry

Examples of audit procedures

Read Minutes of Meetings

Inquire of Legal Counsel

LO# 7

17-11

Page 12: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Review of Subsequent Events for Audit of Internal Control over Financial ReportingAuditors of public companies are responsible to

report on any changes in internal control that might affect financial reporting between the end

of the reporting period and the date of the auditor’s report.

LO# 7

Internal audit reports

Independent auditor reports of reportable conditions

Regulatory agency reports

on ICFR

Information obtained from audit of ICFR

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Page 13: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report

Notify the client that the auditor’s report must no

longer be associated with the financial statements.

Notify the client that the auditor’s report must no

longer be associated with the financial statements.

Notify any regulatory agency having jurisdiction

over the client that the auditor’s report can no longer be relied upon.

Notify any regulatory agency having jurisdiction

over the client that the auditor’s report can no longer be relied upon.

Notify each person known to the auditor to be relying

on the financial statements.

Notify each person known to the auditor to be relying

on the financial statements.

LO# 11

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Page 14: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Final Evidential Evaluation Processes

Perform final analytical procedures.

Evaluate entity’s ability to continue as a going

concern.

Obtain a representation letter.

Review working papers.

Assess final audit results.

Evaluate financial statement presentation

and disclosure.

Obtain an independent review of the engagement.

LO# 8

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Page 15: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

PERFORM FINAL ANALYTICAL PROCEDURES

• Required by auditing standards• Identify unusual fluctuations• If you cannot explain unusual

fluctuations you are not done your audit.

Page 16: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

OBTAIN A MANAGEMENT REPRESENTATION LETTER

• Letter written by auditor, but worded as if written by management, that lists all important information management told auditor during the audit

• Management signs letter• E.g. pp. 430-431

Page 17: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

REVIEW WORKING PAPERS

• Auditors that completed audit will review their working papers

• Complete?• Thorough?• Due-diligence?• Loose ends?

Page 18: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Assess Final Audit ResultsLO# 8

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EVALUATE FINANCIAL STATEMENT PRESENTATION

AND DISCLOSURE

• Are all necessary footnote disclosures present?

• F/S disclosure check list

Page 20: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

OBTAIN AN INDEPENDENT REVIEW OF THE ENGAGEMENT

• Another partner in firm not involved in audit

• Working papers should tell the story of the audit

• Complete? Thorough? Due-Diligence? Loose ends?

Page 21: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

GOING CONCERN JUDGMENT

• Will the client continue on as a going concern into the foreseeable future?

• Will the client survive for one more year?• Steps in a going concern judgment:

1. Gather evidence 2. If a potential going concern problem, talk

with management about their plans3. Make final going concern judgment

- If you do not think they will survive, add an explanatory paragraph after the opinion paragraph explaining your concern

Page 22: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Going Concern ConsiderationsLO# 9

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Page 23: Chapter 17 Completing the Audit Engagement McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Going Concern ConsiderationsLO# 9

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Archiving and RetentionSarbanes-Oxley Act and PCAOB’s Documentation Standard:

• Require audit firms to archive their public-company audit files for retention within 45 days following the time the auditor grants permission to use the auditor’s report in connection with the issuance of the company’s financial statements.

• Require audit firms to retain audit documentation for 7 years from the date of completion of the engagement, as indicated by the date of the auditor’s report, unless a longer period of time is required by law.

• Require audit firms to retain all documents that “form the basis of the audit or review.”

• Require audit firms to include in the audit file for significant matters any document created, sent, or received, including documents that are inconsistent with a final conclusion. Significant changes in audit plans

or conclusions must also be documented.

LO# 8

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Communications with “Those Charged with Governance”

LO# 10

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