Chapter 11
Completing the Audit
“It ain’t over till it’s over.”
– Yogi Berra, former catcher for the New York Yankees
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
11-2
Considerations in Completing the
Audit
• Roll-forward work
• Revenue and expense
accounts
• Attorney letters
• Management
representations
• Going-concern assessment
• Adjusting entries
• Subsequent events
• Audit documentation
review
• Subsequent discovery of
facts
• Omitted audit procedures
• Management letter
• Communications with
those charged with
governance
11-3
Major Activities in Audit
Beginning
of year
End of
year
Audit completion
date
Interim testing
(tests of controls
and substantive
procedures)
“Roll-forward” work
Subsequent events
Revenue and expenses
(dual-dating)
Attorney letters
Management representations
Going-concern assessment
Adjusting entries
Subsequent events
Audit documentation review
Audit report
release date
Subsequent discovery of facts
Omitted audit procedures
Management letter
Communications with those
charged with governance
11-4
Activities Between End of Year and
Audit Completion Date
•
•
•
•
•
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review
11-5
Revenue and Expense
Accounts
• Substantive procedures for related balance
sheet accounts
• Analytical procedures
• Scan accounts for large and unusual entries
• Be aware of “miscellaneous,” “other,” and
“clearing” accounts – “earnings
management”
11-6
Activities Between End of Year and
Audit Completion Date
•
•
•
•
•
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review
11-7
Procedures for Litigation,
Claims, and Assessments
• Inquiry of clients
• Review minutes of meetings of stockholders,
directors, and committees
• Review contracts, loan agreements, and
correspondence from taxing and governmental
agencies
• Obtain information concerning guarantees from
bank confirmations
• Review documentation related to legal services
11-8
Attorney Letters: Responsibilities
• Auditors
– Initiate request for attorney letter
• Client
– Prepare listing, description, and evaluation of litigation,
claims, and assessments for letter
– Send letter to attorney including information related to
litigation, claims, and assessments
• Attorney
– Respond to auditors regarding client’s description of
litigation, claims, and assessments contained in attorney
letter
11-9
Attorney Letters: Contents
• Listing of pending litigation, claims, and
assessments
• Description of each item or case included in
the listing
• Evaluation of the likelihood of an
unfavorable outcome
• Estimate of the range of potential loss
• Understanding regarding unasserted claims
11-10
Activities Between End of Year and
Audit Completion Date
•
•
•
•
•
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review
11-11
Management Representations
• Provided by management to auditors
• Dated using audit completion date
• Broad purpose
– Impress upon management its primary responsibility
for the financial statements
– May establish auditors’ defense if a question related to
inquiries subsequently arises
• Qualify or disclaim an opinion if not provided by
the client
11-12
Management Representations
• Required without regard to materiality:
– Management responsibility for the fairness of the
financial statements
– Availability of all financial records and data
– Management responsibility for design and
implementation of programs and controls related to
fraud
– Disclosure of significant deficiencies in internal control
– Information concerning fraud involving the client
11-13
Representations Related to I/C
• If subject to requirements of AS 5
– Management has performed as assessment of
I/C
– Management’s conclusion with respect to the
operating effectiveness of its I/C
– No subsequent changes in I/C that significantly
affect I/C
– No control deficiencies from prior engagements
have not been properly resolved
11-14
Adjusting Journal Entries
•
•
•
•
Accumulate proposed entries on “score sheet”
Consider pre tax and after tax effects
Require adjustment for all material entries
Require adjustment for proposed entries totaling a
material amount
• Require adjustment for “qualitatively material”
entries
• Recommend adjustment for all other items
11-15
Evaluating Materiality
• Rollover method considers the current
period income effect(s) of misstatements
• Iron curtain method considers the
aggregate effect of the adjustments on the
entity’s balance sheet
• SAB 108 requires adjustments to be
proposed if material under either approach
11-16
Activities Between End of Year and
Audit Completion Date
•
•
•
•
•
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review
11-17
Subsequent Period
Beginning
of year
End of
year
Audit
completion
date
Audit report
release
date
Subsequent
Period
Audit Procedures
• Auditors perform procedures to evaluate events that may affect
presentation and disclosure in the financial statements
• Events occurring during this period are known as subsequent events
11-18
Procedures in Subsequent
Period
• Review latest interim financial statements
• Inquire of officers and other executives
• Read minutes of meetings of shareholders,
directors, and committees
• Obtain responses to attorney letters
• Obtain management representations
11-19
Subsequent Events
• Type I
– Provide new information about conditions existing at
balance sheet date
– Adjust financial statements to reflect new information
• Type II
– Involve events occurring after balance sheet date
– Disclose in financial statements
– Prepare pro forma financial statements
11-20
When are Subsequent Events
Identified?
• Prior to audit completion date
– Perform audit procedures and ensure proper
disclosure
• Following audit completion date but prior to
audit report release date
– Dual date audit report
• Following audit report release date
– “Subsequent discovery of facts”
11-21
Activities Between End of Year and
Audit Completion Date
•
•
•
•
•
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review
11-22
Audit Documentation Review
• Audit supervisor
– Have all steps in audit program been performed?
– Is referencing among documentation clear?
– Are explanations understandable?
• Audit manager and partner
– Is the overall scope of the audit adequate?
– Do overall conclusions support the opinion?
• Reviewing partner
– Are the quality of audit work and reporting consistent
with quality standards of the firm?
11-23
Activities Following Audit
Report Release Date
• Subsequent discovery of facts
• Omitted procedures
• Communication with audit committee (or
those charged with governance)
• Management letters
11-24
Subsequent Discovery of
Facts
• Require disclosure of events if:
– Facts are reliable and existed at report date
– Facts affect financial statements and auditors’ reports
– Persons are continuing to rely on financial statements
and auditors’ reports
• If client refuses disclosure, auditors should inform
board that he or she will notify regulatory agencies
and others relying on the reports
11-25
Omitted Procedures
• Perform procedures if:
– Omitted procedures are important
– Individuals are currently relying on financial statements
and auditors’ reports
• If previous opinion can be supported, no further
action necessary
• If previous opinion cannot be supported
– Withdraw the original report
– Issue revised reports
– Inform persons currently relying on the financial
statements
11-26
Communication with Individuals
Charged with Governance
• Auditors’ responsibility under
GAAS
• Overview of planned scope and
timing of audit
• Judgment about quality of
accounting policies, estimates,
and disclosures
• Significant difficulties
encountered during audit
• Uncorrected misstatements
• Disagreements with
management
• Material, uncorrected
misstatements
• Representations requested from
management
• Management consultations with
other auditors
• Significant issues discussed
with management
• Other findings or issues
significant and relevant to those
charged with governance
11-27
Management Letters
• Not required under GAAS
• Are prepared as a by-product of procedures
performed in audit
• Provide recommendations to client for
improving effectiveness and efficiency of
operations
• Delivered by auditors to client following
audit engagement
11-28
Summary of Audit
Communications