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

LO# 1
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.
Examples
•
Pending or threatened litigation
• Actual or possible claims and assessments
• Income tax disputes
• Product warranties or defects
• Guarantees of obligations to others
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.
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LO# 2
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.
Review tax returns, IRS reports, and schedules supporting the client ’s income tax liability.
Confirm or otherwise document guarantees and letters of credit.
Inspect other documents for possible guarantees or other similar arrangements.
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LO# 2
Specific Audit Procedures Conducted Near
Completion of Audit
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.
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LO# 3
A 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.
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LO# 3
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Long-term contracts to purchase raw materials or sell their products at a fixed price
LO# 4
To obtain a favorable pricing arrangement
To secure the availability of raw materials
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.
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LO# 5
Balance
Type I Event
Sheet Date
Type II Event
Conditions existed before the balance sheet date and affect estimates that are part of financial statements
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
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LO# 5
Figure 17-1
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When 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 so almost always this is what the CPA firm does)
(2) Change the date of the auditor ’s report to the date of the subsequent event —extends liability
LO# 6
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Inquire of
Management
Examples of audit procedures
Read Minutes of Meetings
Read Interim
Financial
Statements
Inquire of
Legal Counsel
Examine the
Books of
Original Entry
LO# 7
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LO# 7
Review of Subsequent Events for Audit of
Internal Control over Financial Reporting
Auditors of public companies with $75,000,000 market cap must 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.
Internal audit reports
Independent auditor reports of reportable conditions
Regulatory agency reports on ICFR
Information obtained from audit of ICFR
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Perform final analytical procedures.
Obtain a representation letter.
Review working papers.
LO# 8
Assess final audit results.
Evaluate entity ’s ability to continue as a going concern.
Evaluate financial statement presentation and disclosure.
Obtain an independent review of the engagement.
The AICPA’s requirement is
SQCS 10.38
The PCAOB’s requirement is
AS No. 7
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LO# 8
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Sarbanes-Oxley Act and PCAOB ’ s Documentation Standard (note that SAS 103 is similar but a bit less stringent):
•
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 (5 years if a privately held company and thus governed by SAS 103) 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.
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LO# 8

LO# 9
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LO# 9
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Communications to the Audit Committee
LO# 10
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Communications to the Audit Committee (cont.)



In addition to the communications noted on the previous slide, some re internal control are required
If public company with $75,000,000 market cap, as we noted in Ch. 7, AS 7 says significant deficiencies must be communicated to the audit committee
If private (or small public) company, the auditor does not have to look for IC problems (other than for the purpose of performing an effective audit of the financials). However,
SAS 115 says the auditor, if he learns of them, must communicate both material weaknesses and significant deficiencies to the audit committee (if there is no audit committee, then to others “charged with governance).”
Also, auditor must communicate all this to management.

LO# 11
Notify the company that the auditor ’ s report must no longer be associated with the financial statements.
If a private company, notify persons known to the auditor to be relying on the financial statements (e.g. banks, other creditors).
If a public company, make sure the SEC is notified that the auditor ’s report and the financial statements can no longer be relied upon.
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