Completing the Audit
Chapter 18
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Learning Objective 1
Conduct a review for contingent
liabilities and commitments.
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Summary of the
Audit Process
Plan and design
Phase I
an audit approach.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Perform analytical
procedures and
Phase III
tests of details
of balances.
Phase IV
Complete the
audit and issue
an audit report.
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Phase IV –
Completing the Audit
Review for
contingent
liabilities
Review for
subsequent events
Accumulate
final evidence
Evaluate results
Issue audit report
Communicate with
audit committee
and management
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Contingent Liabilities
A contingent liability is potential future
obligation to an outside party for an
unknown amount resulting from
activities that have already taken place.
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Likelihood of Occurrence and
Financial Statement Treatment
Likelihood of
Financial Statement
Occurrence of Event
Treatment
Remote (slight chance) No disclosure necessary
Reasonably possible
Footnote disclosure
Probable
Adjust financial statements
OR footnote disclosure
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Audit Procedures for
Finding Contingencies
Inquire of management (orally and in writing)
about the possibility of unrecorded contingencies.
Review current and previous years’ internal
revenue reports for income tax settlements.
Review the minutes of directors’ and stockholders’
meetings for indications of lawsuits.
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Audit Procedures for
Finding Contingencies
Analyze legal expenses and review invoices
and statements from legal counsel.
Obtain a letter from each major attorney of the
client as to the status of pending litigation.
Review audit documentation for any information
that may indicate a potential contingency.
Examine letters of credit in force.
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Learning Objective 2
Obtain and evaluate letters
from the client’s attorneys.
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Inquiry of Client’s Attorneys
A list including (1) pending threatened litigation and
(2) asserted or unasserted claims or assessments
with which the attorney has had involvement.
A request that the attorney furnish information or
comment about the progress of each item listed.
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Inquiry of Client’s Attorneys
A request for the identification of any unlisted
pending or threatened legal action or a statement
that the client’s list is complete.
A statement informing the attorney of the attorney’s
responsibility to inform management of legal matters
requiring disclosure in the financial statements and
to respond directly to the auditor.
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Learning Objective 3
Conduct a post-balance-sheet
review for subsequent events.
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Period Covered by
Subsequent Events Review
Client’s ending
balance sheet
date
Audit
Date client
report issues financial
date
statements
12-31-02
3-11-03
Period to which
review for
subsequent
events applies
3-26-03
Period for
processing
the financial
statements
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Types of Subsequent Events
Those that have a direct effect on the
financial statements and require adjustment
Those that have no direct effect on the
financial statements but for which
disclosure is advisable
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Requiring Adjustment
• Declaration of bankruptcy by a customer
with an accounts receivable balance.
• Settlement of a litigation at an amount
different from the amount recorded on
the books
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Requiring Adjustment
• Disposal of equipment not being used in
operations at a price below the current
book value
• Sale of investments at a price below
recorded cost
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Advisability of Disclosure
• Decline in the market value of securities
held for temporary investment or resale
• Issuance of bonds or equity securities
• Decline in the market value of inventory as
consequence of government action barring
further sale of a product
• Uninsured loss of inventories as a result of fire
• A merger or an acquisition
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Audit Tests
 Inquiry of management
 Correspond with attorneys
 Review internal statements prepared
subsequent to the balance sheet date
 Review records prepared subsequent
to the balance sheet date
 Examine minutes issued subsequent
to the balance sheet date
 Obtain a letter of representation
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Dual Dating
The first date is the date for the completion
of field work except for a specific exception.
The second date, which is always later,
deals with the exception.
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Learning Objective 4
Design and perform the final steps
in the evidence-accumulation
segment of the audit.
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Final Evidence Accumulation
1) Perform final analytical procedures.
2) Evaluate the going-concern assumption.
3) Obtain a management representation letter.
4) Consider information accompanying the
basic financial statements.
5) Read other information in the annual report
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Information Accompanying Basic
Financial Statements
Balance sheet
Income statement
Statement of
cash flows
Footnotes
Basic
financial
statements
Standard
auditor’s
report
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Information Accompanying Basic
Financial Statements
Detailed
comparative
statements
Statistical data
Schedule of
insurance
coverage
Information
accompanying
basic financial
statements
Separate
paragraph –
unqualified,
qualified,
or disclaimer
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Learning Objective 5
Integrate the audit evidence
gathered, and evaluate the
overall audit results.
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Evaluate Results
Sufficiency of evidence
Evidence supports auditor’s opinion
Financial statement disclosures
Audit documentation review
Independent review
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Evaluating Results and
Reaching Conclusions
Actual audit evidence
(by cycle, account,
and objective)
Evaluate results
(by account and cycle)
Audit procedures
Sample size
Items to select
Timing
Estimated misstatement
(by account)
Achieved audit risk
(by account and cycle)
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Evaluating Results and
Reaching Conclusions
Evaluate overall
financial statements
Estimated misstatement
(overall statements)
Achieved audit risk
(overall statements)
Issue
audit
report
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Issue the Audit Report
The audit report is the only thing that most users
see in the audit process and the consequences of
issuing an inappropriate report can be severe.
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Learning Objective 6
Communicate effectively with the
audit committee and management.
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Communicate with the Audit
Committee and Management
Communicate fraud and illegal acts
Communicate reportable conditions
Other communication with audit committee
Management letters
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Learning Objective 7
Identify the auditor’s
responsibilities when
facts affecting the audit
report are discovered
after its issuance.
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Period Covered by
Subsequent Events Review
Client’s ending
balance sheet
date
12-31-02
Audit
report
date
Date client
issues financial
statements
3-11-03 3-26-03
Period to which Period for
review for
processing
subsequent
the financial
events applies
statements
Period in which
subsequent
discovery of
facts is made
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End of Chapter 18
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