Auditing Operations and
Completing the Audit
 Wrapping
Up Field Work
 Evaluating
Remaining Accounts
in the Financial Statements
Slide 16- 1
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Relationships Between Balance Sheet
and Income Statement Accounts
Balance Sheet Item
Accounts receivable
Notes receivable
Securities and investments
Revenue
Sales
Interest
Interest, dividends,
gains, investor’s income
Interest-bearing debt
Slide 16- 2
Uncollectible accounts
Uncollectible notes
Losses
Purchases, cost of
goods sold, and
payroll
Inventories
Property, plant and equip.
Intangible assets
Prepaid expenses
Accrued liabilities
Expenses
Rent, gains
Royalties
Depreciation; repairs
Amortization
Various expenses
Various expenses
Interest
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Substantive Tests
Selling, General & Admin Expenses

Perform Analytical Procedures
 Develop an expectation of the A/C balance
 Determine difference from expectation that can be
accepted without investigation
 Compare actual A/C balance with expectation
 Investigate significant deviations from expectation
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Substantive Tests
Selling, General & Admin Expenses

Perform Analytical Procedures
 Develop an expectation of the A/C balance
 Determine difference from expectation that can be accepted
without investigation
 Compare actual A/C balance with expectation
 Investigate significant deviations from expectation

Obtain or prepare analyses of selected A/Cs
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Substantive Tests
Selling, General & Admin Expenses

Perform analytical procedures
 Develop an expectation of the A/C balance
 Determine difference from expectation that can be accepted
without investigation
 Compare actual A/C balance with expectation
 Investigate significant deviations from expectation

Obtain or prepare analyses of selected A/Cs

Obtain or prepare analyses of critical
expenses in the income tax return
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Payroll Internal Controls
Segregation of Duties
HR and Employment Data
Timekeeping & Labor Distribution
Payroll Preparation
Distribution of Pay
Application Controls
Reasonableness Checks
Employee Validity Checks
Data Accuracy Checks
Such as: HR Table, Timekeeping
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Substantive Tests
Salaries, Wages, Compensation
• Perform Analytical Procedures & Investigate
Fluctuations in Various Components
• Obtain Officer Compensation Data & Trace to
Authorization
• Test Year-end Accrued Payroll
• Test/Evaluate Special Compensation:
Fair Value Accounting for Stock Options [SFAS 123(R)]
Profit Sharing & Bonus Plans
Commissions
Deferred Compensation
Pension Expense & Liabilities
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Audit Procedures Completed
Near the End of Field Work
Search for unrecorded liabilities
 Review minutes of Bd of Dir meetings
 Perform final analytical procedures
 Identify loss contingencies

Slide 16- 8
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Loss Contingencies

Reflected in F.S. amounts when:
It is probable (> 50/50 chance) that a loss
had been sustained as of B.S. date and
Amount of loss can be reasonably estimated

Only disclosed in notes to F.S. when it is
at least reasonably possible that a loss
has been sustained as of B.S. date or
probable but cannot be estimated.

No amount or disclosure in F.S. when
the possibility of loss is remote.
Slide 16- 9
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Identifying Loss Contingencies

Ask Client Plus Mgmt Rep Letter

Review client correspondence with major
customers & regulators for disputes and
financial institutions for endorsements made

Past Experience

Subsequent Events

Board of Director Minutes

Review Lawyer Invoices (undisclosed cases)

Letter to Outside (+ internal?) Legal Counsel
Slide 16- 10
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Letter to Legal Counsel


Client Letter - Prepared & Sent by Auditor
Ask for:
1. List of all pending or recently settled
litigation
2. For all identified litigation and those audit
procedures identified:
a. Period in which the underlying cause for legal
action occurred
b. Probability of an unfavorable outcome
c. Amount or range of potential loss
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Excessive Commitments
• Usually relates to acquisition of scarce
raw material/goods or from monopolistic
source.
• Information on commitments must be
disclosed in F.S. when deemed beyond
current normal needs.
• Client must disclose description and
extent of commitments and risks involved.
Slide 16- 12
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Audit Procedures Completed
Near the End of Field Work




Search for unrecorded liabilities
Review minutes of Bd of Dir meetings
Perform final analytical procedures
Identify loss contingencies
 Review
Subsequent Events
(What’s happened since the B.S. date?)
Slide 16- 13
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Subsequent Events
Type 1/Recognized: Evidence as to
conditions existing at B.S. date that effect
amounts, e.g., better/more data to
improve accounting estimates embedded
in the F.S. (so AJE needed). Primary
Examples:
 Large bad debt realized
 Large recovery or significant recoveries
where we had significant allowance for
uncollectibility
 Settlement of litigation or Closer Estimate
Slide 16- 14
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Subsequent Events
Type 2/Non-Recognized: Relates to
things occurring after the B.S. date, which,
if not disclosed, would make the F.S.
misleading to many users for projection
purposes (hinder continued
performance)(so only disclosure):
Significant merger/acquisition
Major facility destruction or forced closure
Major change in financial position.
Significant pension change requiring large
payment
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Slide 16- 15
Responsibility for Subsequent Events
Identifying Subsequent Events
 Review
latest available financial statements
and minutes of the board and selected
committees.
 Review
lawyer’s letter & Invoices.
 Ask
management (including matters dealt
with at meetings for which minutes are not
available).
 Obtain
representations from management.
(Note: Similar steps to ID Loss Contingencies)
Slide 16- 17
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Audit Procedures Completed
Near the End of Field Work





Search for unrecorded liabilities
Review minutes of Bd of Dir meetings
Perform final analytical procedures
Identify loss contingencies
Review subsequent events
 Obtain
Slide 16- 18
Client Representation Letter
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Mgmt Representation Letter

Mgmt responsibility for fairness of F.S.

Mgmt’s belief that F.S. are fairly stated/GAAP

Completeness of provided records(minutes,
communications with regulatory agencies,
unrecorded transactions)

Known fraud

Plans impacting classification or values of
assets or liabilities

Related party transactions and balances
Slide 16- 19
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Mgmt Rep Letter (con’t)
 Loan
guarantees
 Significant
estimates/concentrations (SOP 94-6)
 Actual/Possible
violations of laws or regs
 Gain/Loss contingencies or unasserted
claims (SFAS 5)
 Satisfactory title to assets or rights
limitations
 Compliance
with contractual agreements
 Subsequent events
Slide 16- 20
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Audit Procedures Completed
Near the End of Field Work






Search for unrecorded liabilities
Review minutes of Bd of Dir meetings
Perform final analytical procedures
Identify loss contingencies
Review subsequent events
Obtain client representation letter

Assess Cumulative Materiality of
Individual Adjustments & Uncorrected
Misstatements from Previous Year
Slide 16- 21
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Audit Procedures Completed
Near the End of Field Work







Search for unrecorded liabilities
Review minutes of Bd of Dir meetings
Perform final analytical procedures
Identify loss contingencies
Review subsequent events
Obtain client representation letter
Assess cumulative materiality of Individual adjustments
& Uncorrected Misstatements from Previous Year
Review Subordinate W/Ps & Conduct
Concurring or 2nd Partner Review
 Final Review of F.S. Disclosure Adequacy

Slide 16- 22
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Communicating with Those
Charged with Governance
Early in the Audit
 Obtain
Information About the Entity
 Share Overall Planned Audit Scope & Timing
of the Audit and Auditor Responsibilities
 Representations
to be Asked of Management
 Factors,
if any, Potentially Having a Bearing
on Auditor Independence.
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Communicating with Those
Charged with Governance (con’t)
During or at End of Audit
 Significant
Accounting Policies, Accounting
Estimates, F.S. Disclosures, Uncertainties,
Unusual/Non-Recurring Transactions
 Significant
 Mgmt’s
Difficulties Encountered
Consultation with Other Auditor
 Significant
Uncorrected Misstatements or
Other Disagreements with Mgmt
 Significant
Slide 16- 24
Findings, Misstatements & Issues
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Communicating with Those
Charged with Governance (con’t)
During or at End of Audit
 Significant
Internal Control Deficiencies &
Material Weaknesses.
 Detected
Fraud & Illegal Acts
 Substantial
Doubt – Going Concern
Format
 Oral
or in Writing (Usually Based on Significance)
 But All Must be Documented
Slide 16- 25
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Key Additions for Public
Companies
•
Engagement letter.
•
Overall audit strategy, timing & significant
risks (early).
•
Audit Committee must approve all services.
•
Use by auditor of specialized skills, internal
auditors or non-employees or CPA firms
(early).
•
Details of client critical accounting policies,
practices and accounting estimates AND
auditor’s assessment.
Slide 16- 26
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Key Additions for Public
Companies (con’t)
•
Assessment of quality of financial reporting.
•
Difficult or contentious issues requiring
consultation beyond audit team.
•
Auditor’s evaluation of going concern.
•
Any deviations from a standard audit report.
•
All communications MUST be prior to report
issuance.
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Auditor Responsibility for Other
Information Included with the F.S.
Other Non-GAAP-Required Information
√ READ to identify inconsistencies with the
audited F.S.
√ If none found, no further effort or reporting.
√ If found, ask client to revise.
√ If client refuses, add explanatory paragraph to
audit report (no change to opinion on F.S.) or
withhold release of audit report or withdraw
from engagement .
(Note: If F.S. is incorrect & material, propose adjustment or modify opinion. )
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Auditor Responsibility for Other
Information Included with the F.S.
GAAP-Required Supplementary Information
 Inquire
of management about methods of preparing information,
following prescribed guidelines, whether changed from the prior
period, and any significant assumptions or interpretations.
information for consistency with (1) management’s
responses to the inquiries, (2) basic F.S. and (3) auditor’s knowledge
obtained during the F.S. audit.
 Compare
 Obtain
written representations from management acknowledging
(1) its responsibility that the information, (2) is measured &
presented per prescribed guidelines, (3) whether methods have
changed & (4) significant assumptions or interpretations.
 Discussed
in the F.S. audit report in an emphasis of a matter
paragraph after the opinion paragraph – no impact on F.S. opinion,
even if found to be incorrect or omitted.
(No mention in report under PCAOB standards)
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Slide 16- 29
Auditor Responsibility for Other
Information Included with the F.S.
Offering Assurance for Supplementary Information
AICPA Standards:
 Auditor
could be asked to provide assurance with separate opinion.
Auditors perform procedures to provide assurance on whether
supplemental information is fairly stated, in all material respects, in
relation to the F.S. as a whole. Supplementary must be derived
from, & relate directly to, underlying accounting & other records.
 Emphasis
of a Matter paragraph would include opinion that would
not alter F.S. audit opinion.
PCAOB Standards (AS 17):
 Also
optional, very similar procedures as AICPA, but requires
testing info accuracy, unlike AICPA, must be done in conjunction
with the F.S. audit and can be a separate report.
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Responsibilities After Report Date

Should we have any?
Of Course; Why Not?

Discovery of Unknown Information, Which
Was Available, at Audit Report Date

Learning of Omitted, but Necessary, Audit
Procedures
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Subsequent Discovery of Facts
Existing at Audit Report Date
Auditor Action is Required Unless he/she
Can Conclude (Document) that Information:
1. Is Unreliable or
2. Did NOT Exist at the Audit Report Date or
3. Would NOT Have Effected Audit Report or
4. No Persons who would attach importance to
the information are Currently, or Likely to be,
Relying on the Previously Audited F.S.
Slide 16- 32
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Subsequent Discovery of Facts
Existing at Audit Report Date
Auditor actions to prevent further reliance
on the previous auditor’s report:
Advise client to disclose the information and/or
restate the F.S. or include in about to be
released subsequent period F.S. & tell SEC.
If client refuses, Auditor should:
 Notify each Bd of Dir member of refusal and planned
auditor actions
 Notify Client That Auditor’s Report Should No Longer Be
Associated With the F.S.
 Notify SEC & Each Party Known to be Relying on the F.S.
that the Audit Report Should No Longer be Relied Upon.
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Discovery of Omitted Audit
Procedures After Report Date
If the Omitted Procedures were important to
expressing the opinion, and are still important in
supporting the previously reported opinion, AND
parties are currently, or likely to be, relying on
the audit report:
Attempt to perform the procedures or alternate ones.
If results alter original conclusions, treat as discovery of
new facts and take similar notification action to that on
previous slide.
If unable to perform, consult attorney as to actions to
satisfy responsibilities to client, SEC and persons relying
on the auditor’s report.
Slide 16- 34
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