QUIPANES, Edgar Jay Pace BSA - III
Auditing and Assurance: Concepts and Applications 2
Seatwork
AUDITED FINANCIAL STATEMENTS with Full Disclosures
An audited financial statement is any financial statement that a certified public
accountant (CPA) has audited. When a CPA audits a financial statement, they will ensure
that the statement adheres to general accounting principles and auditing standards.
It is the examination of an entity's financial statements and accompanying
disclosures by an independent auditor. The result of this examination is a report by the
auditor, attesting to the fairness of presentation of the financial statements and related
disclosures.
Types of Audited Financial Statements:
1. Balance Sheet
2. Cash Flow Statement
3. Income Statement
4. Statement of Shareholder’s Equity
When an independent auditor gives his opinion/ report on the financial statements of
the company about its true and fair presentation is called audited financial statements. It
is the responsibility of the company’s management is to prepare the company’s financial
statements and related disclosures.
These audited financial statements are then verified and audited by an independent
third party known as external auditors of the company and give their opinion on the
basis of their findings as to the result of their audit from the procedures that they
performed. The audited financial statements include:
 Examination and evaluation of financial record and expression of opinion on
financial statement
 Audit of financial system and transaction including an evaluation of compliance
with applicable statutes and regulation which affect the accuracy and
completeness of accounting record.
 Audit of internal control and internal audit function that assist in safeguarding
asset and resources and assure the accuracy and completeness of accounting
record.
Notes to the financial statements disclose the detailed assumptions made by
accountants when preparing a company's: income statement, balance sheet, statement of
changes of financial position or statement of retained earnings. The notes are essential to
fully understanding these documents. The main purpose of the notes to the financial
statements is to further clarify accounting procedures used by a company, as well as to
divulge information that has occurred during and immediately after the close of the
accounting period.
The notes are used to make important disclosures that explain the assumptions used
to prepare the financial statements of a company. Common notes to the financial
statements include accounting policies, depreciation of assets, inventory valuation, and
subsequent events.
The full disclosure principle states that all information should be included in an
entity's financial statements that would affect a reader's understanding of those
statements. The interpretation of this principle is highly judgmental, since the amount of
information that can be provided is potentially massive.
All relevant and necessary information for the understanding of a company’s
financial statements must be included in public company filings. For example, financial
analysts who read financial statements need to know what inventory valuation method
has been used, if there have been any significant write-downs, how depreciation is being
calculated, and other critical information for the understanding of the financial
statements.
The full disclosure principle does not require the release of every piece of available
information to the public. On the contrary, the rule would be impractical then, as it
would dump a huge volume of information on analysts and investors. The principle
urges the disclosure of information that can have a material impact on the company’s
financial results or financial position.
The principle helps foster transparency in financial markets and limits the
opportunities for potentially fraudulent activities. The importance of the full disclosure
principle continues to grow amid the high-profile scandals that involved the
manipulation of accounting results and other deceptive practices. The most notable
examples are the Enron scandal in 2001 and Madoff’s Ponzi scheme discovered in 2008.
In addition, the full disclosure principle can be used in contractual law. In such a
case, the parties in a business transaction must disclose to each other all material
information that is related to the execution of a transaction.
Full Disclosure Requirements
Generally, public companies are required to disclose only information that can have
a material impact on the financial results of the company. The most common items that
the companies must report include the following:
 Audited financial statements
 Employed accounting policies and changes in the accounting policies
 Non-monetary transactions
 Material losses
 Asset retirement obligations
 Details and reasons for goodwill impairment
 Existing litigation
Where is the Information Disclosed?
The information is disclosed in the regulatory filings (e.g., SEC filings) that a public
company must submit. The most important filings include the company’s quarterly and
annual reports, which contain audited financial statements, various notes and schedules
to the statements, as well as descriptive guidance from the management.
In the filings, management also discusses the risks associated with the company’s
operations and provides forward-looking statements concerning future decisions and
activities.
AUDIT PLAN FOR LIABILITIES
Audit Objectives:
1. Accounts payable represent amounts currently payable to trade creditors for
purchases of goods and services as at the end of the reporting period.
2. Accounts payable have been properly recorded.
3. Accounts payable are properly described and classified and adequate disclosures
have been made.
Audit Procedures:
1. Obtain a list of accounts payable from the subsidiary ledger, and:
 Check its footing.
 Check if the list reconciles with the general ledger control account.
 Trace individual balances to the subsidiary ledger.
 Test accuracy of balances in the subsidiary ledger.
 Adjust non-trade accounts erroneously included in supplier’s accounts.
 Investigate and reclassify significant debit balances.
2. Confirm accuracy of individual balances appearing in the subsidiary ledger by
requesting statements of accounts from suppliers, and:
 Reconcile supplier’s statements of accounts with clients records and
investigate any discrepancy.
 If suppliers do not respond with the requests, perform extended procedures,
like:
 Reviewing payments after year-end.
 Checking supporting documents.
 Discussing the account with appropriate officer.
3. Review correspondence with suppliers for possible adjustments.
4. Test propriety of cutoff:
 Examine purchases recorded and suppliers’ deliveries made a week before
and after the end of the reporting period and ascertain whether the
purchases were recorded in the proper period.
 Investigate large amounts of purchases returned shortly after the end of the
reporting period.
5. Ascertain whether some payables are secured with asset pledges.
6. Compare payments after the reporting date with year-end schedule of accounts
payable.
7. Review propriety of financial statement presentation and adequacy of disclosures.
8. Perform analytical review procedures.
9. Obtain accounts payable representation letter.
FOR NON-LIABILITIES
Audit Objectives:
1. Authorization of liabilities incurred.
2. Validity of recorded liabilities.
3. Recognition and recording of significant liabilities.
4. Compliance with terms, restrictions, conditions, and other requirements of debt
agreements.
5. Assets pledged or mortgaged and other guarantees related to noncurrent liabilities
are identified.
6. Accuracy of interest and other charges related to noncurrent liabilities.
7. Property of financial statement presentation and adequacy of disclosures.
Audit Procedures:
1. Obtain schedule/s of noncurrent liabilities, indicating:
As to general nature:
 Description or nature of the noncurrent liabilities.
 Creditor/s
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Original principal amount
Interest rate
Collateral and/or guarantees
Terms, restrictions, conditions, and other requirements imposed by the
creditors
As to principal amount outstanding:
 Beginning-of-the-year balance
 Additions during the year
 Repayments or renewals during the year
 Balance at year-end
As to interest:
 Accrued or prepaid at the beginning of the year
 Amount incurred during the year
 Payments during the year
 Accrued or prepaid at year-end
2. Foot and cross-foot the schedule.
3. Verify accuracy of the schedule.
As to general nature:
 Obtain copies or excerpts of debt instruments and trace data to the
schedule.
As to principal amount outstanding:
 Trace beginning balances to last year’s working papers, or in an initial audit,
establish accuracy of beginning balances by:
 Reference to debt instruments and prior year’s recordings
 Tracing to beginning ledger balances
 Trace proceeds to cash receipts records for new liabilities incurred in the
current year.
 Trace payments to cash disbursements records and canceled checks.
 Vouch to supporting documents the renewals in the current year.
 Agree working paper ending balances with the general ledger accounts.
As to interest:
 Trace beginning balances to last year’s working papers, or in an initial audit:
 Establish accuracy by an independent computation based on debt
instruments.
 Trace to beginning ledger balances.
 Recompute the interest:
 Incurred
 Accrued
 Prepaid
 Trace payments to cash records and canceled checks.
4. Verify authorizations by reference to minutes of the board of directors’ meetings.
5. Confirm directly with the creditors or trustees the following:
 Principal amount still outstanding
 Interest rates
 Interest accrued
 Collateral and/or guarantees
6. Determine client’s compliance with loan agreements.
7. Account for the used and unused debt instruments like bond certificates and
promissory notes.
8. Ascertain proper cancellation of paid or retired debt instruments.
9. Recompute the accuracy of any discount or premium amortization.
10. Reconcile interest payments with recorded liabilities.
11. Verify propriety of financial statement presentation and adequacy of disclosures.
AUDIT PLAN FOR SHAREHOLDER’S EQUITY
Audit Objectives:
1. Proper authorization of transactions involving shareholders' equity accounts.
2. Proper accounting treatment of transactions involving shareholders' equity.
3. Compliance with legal requirements related to corporate capitalization.
4. Propriety of financial statement presentation and adequacy of disclosures
Audit Procedures:
1. Obtain a copy of the latest articles of incorporation and determine, for each class
of share capital, the:
 authorized share capital;
 par or stated value; and
 preferences and limitations, if any.
2. Obtain a schedule of the share capital, subscribed share capital, and treasury share
accounts indicating the member of shares and amounts for the:
 beginning-of-year balances;
 additions and deductions for the current year; and
 end-of-year balances.
3. Foot and cross-foot the schedule.
4. Verify accuracy of the schedule.
 Trace beginning balances to last year's working papers or in case of an
initial audit, establish accuracy of beginning balances by:
 Test-tracing prior years' recordings and supporting documents.
 Tracing beginning balances to general ledger balances.
 Trace proceeds to cash receipts records for additional issues or
subscriptions to share capital and reissues of treasury shares.
 Trace payments for share capital retirements and acquisitions of treasury
shares to cash disbursements records and canceled checks.
 Agree working paper ending balances with the general ledger balances.
 Trace authorizations by reference to minutes of meetings of the board of
directors and shareholders.
5. Where the client is being serviced by an independent transfer agent or registrar:
 Confirm share capital issued and treasury shares.
 Arrange for the inspection and count of treasury shares.
6. Where the client does not maintain an independent transfer agent or registrar:
 Obtain from the corporate secretary a schedule of:
 shareholders;
 subscribers;
 subscriptions receivable; and
 treasury shares.
 Foot and cross-foot the schedule.
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Test-trace to stock and transfer book
Trace balances per schedule to general ledger balances.
Inspect and account for unissued, canceled, treasury share certificates.
Determine if the treasury shares had been properly endorsed in favor of the
corporation
7. Confirm subscriptions receivable and consider collectibility.
8. Review articles of incorporation, by-laws, and minutes of meetings of the board
of directors and shareholders relating to share capital and related accounts.
9. Obtain schedules of other equity accounts, indicating beginning-of-year balances;
additions and deductions during the current year, and end-of-year balances.
10. Foot and cross-foot the schedules.
11. Verify the accuracy of the schedules.
 Trace beginning balances to last year's working papers or, in case of an initial
audit, establish accuracy of beginning balances by:
 Test-tracing to prior year's recordings and supporting documents.
 Tracing beginning balances to general ledger balances.
 For current year transactions:
 ascertain authorization; and
 determine propriety of accounting treatment.
 Agree working paper ending balances with general ledger balances.
12. Reconcile dividends paid to rates authorized in directors' minutes of meetings
13. Ascertain compliance with the requirements of the Securities and Exchange
Commission (SEC) and other regulatory bodies and contractual obligations to
capitalization of retained earnings.
14. Determine propriety of financial statement presentation and adequacy of
disclosures.