chapter 24
Completing the Audit
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1
Jena
describe what is meant by Interim Testing.
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interim
A
auditing
date on
balance sheet
B
fall 2015
date report issued
end of field work
report date
12/31/15
C
D
3
interim
A
auditing
date on
balance sheet
B
fall 2015
date report issued
end of field work
report date
12/31/15
C
D
4
Contingent Liabilities / Attorney’s Letter
Subsequent Events
Management Representations
analytical procedures
Final assessment of audit risk - opinion
communications to audit comm or mgmt
• AU-c 260 Communication with Those Charged
with Governance
• AU-c 265 Communicating Internal Control
Related Matters Identified in an Audit
subsequent discovery of facts
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unrecorded liabilities
examining subsequent payments to
suppliers and other creditors to ensure
that they were correctly recorded.
almost $5 million of purchases
applicable to Dec. 31 audit period that
had not been included as liabilities.
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Contingent Liabilities / Losses
• A potential future payment to an outside party
from an existing condition
• Uncertainty about the amount
• Outcome will be resolved by future events
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Contingent Liabilities / Losses
• Lawsuits are an example of a contingency
• Income tax disputes
• Product warranties
• Guarantees of the debts of others
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Katie
what does SFAS No. 5 (ASC 450) teach
us about
contingent losses or
contingent liabilities
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SFAS 5 (ASC 450) contingencies
probable
estimable
probable
reasonably possible
reasonably possible
not estimable
estimable or
not estimable
disclose
“
“
remote
ignore
ignore
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record loss
10
SFAS 5 (ASC 450) contingencies
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estimable
can’t be
estimated
Probable
accrue loss
fn disclose
Possible
fn disclose
fn disclose
Remote
do nothing
do nothing
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Contingencies – lawsuits
audit procedures
• Inquire of management
• Review minutes of BoD meetings
• Analyze legal expense
• Obtain a letter from each major attorney
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Nicole
Management is our primary source of
information about
Litigation, Claims and Assessments
what is our most important source of
evidence to corroborate managements’
representations regarding LCA ?
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Inquiry of Client’s Attorney
A list including
(provided by client’s Senior Management)
– Pending litigation
– Asserted or unasserted claims
Information about each item on list
– Likelihood of an unfavorable outcome
– Amount or range of potential loss
A statement that the list is complete
Page 348
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Huyen
“Inquiry of a Client’s Attorney”
this is an auditing procedure
Who sends this letter to the attorney ?
To whom does their attorney respond ?
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Romy
“Inquiry of a Client’s Attorney”
what kind of problem do we have
if their attorney refuses to respond ?
what kind of report will we issue ?
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Julissa
Do we modify the first paragraph?
Do we modify the Management’s Responsibility paragraph?
Do we modify the Auditor’s Responsibility paragraph?
Do we modify the Opinion paragraph?
Is there a Basis for Opinion paragraph? Before or after?
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interim
A
auditing
B
fall 2015
date report issued
end of field work
report date
12/31/15
C
D
20
Katina
describe the two types of subsequent events
how do we decide whether to make an
adjusting entry to include the effects of the
subsequent event in the financial statement
balances
or
just disclose the event in the footnotes
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subsequent events
Type I - adjusting journal entry
a. Those (subsequent events) that provide evidence of conditions that
existed at the date of the financial statements
Type II - disclose
b. Those (subsequent events) that provide evidence of conditions that arose
after the date of the financial statements
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Type I - adjusting journal entry
• Declaration of bankruptcy by a customer with
a large account receivable
• Settlement of litigation for an amount greater
than recorded
• Sale of investments for less than recorded
amount
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Type II - disclosure
• Issue bonds or equity securities
• Merger or acquisition
• Loss due to fire or natural disaster
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subsequent events – auditing procedures
inquire of management
read internal financial statements
read minutes of Bd of Directors’ meetings
obtain a letter of representation
page 353
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AU-C Section 580*
Written Representations
Source: SAS No. 122.
Effective for audits of financial statements for periods ending on or after
December 15, 2012.
Introduction
Scope of This Section
.01 This section addresses the auditor's responsibility to obtain written
representations from management and, when appropriate, those charged with
governance in an audit of financial statements.
.02 Exhibit D, "List ofAU-C Sections Containing Requirements for Written
Representations," lists other AU-C sections containing subject matter-specific
requirements for written representations. The specific requirements for written
representations of other AU-C sections do not limit the application of this
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Letter of representation
Management is responsible for the financial statements
Management believes the f/s conform to GAAP
All financial records have been made available
All minutes have been made available
Information concerning fraud or illegal acts
Information concerning related party transactions
Unasserted claims that are probable have been disclosed
Subsequent events
Page 355
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Julia
Who prepares and signs the letter of client
representations?
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Christina
we must obtain certain representations from
management in writing
what kind of problem do we have if the client refuses?
what kind of report will we issue ?
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Gordon
Do we modify the first paragraph?
Do we modify the Management’s Responsibility paragraph?
Do we modify the Auditor’s Responsibility paragraph?
Do we modify the Opinion paragraph?
Is there a Basis for Opinion paragraph? Before or after?
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Iris
what is a “waived” or “passed” adjustment?
on page 360
“unadjusted misstatement audit schedule”
“summary of possible misstatements”
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Materiality
page 122
minimum
percent dollar
earnings from operations
current assets
total assets
current liabilities
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7,370
51,027
61,367
13,216
0.03
0.03
0.01
0.03
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1,531
614
396
maximum
percent dollar
0.06
0.06
0.03
0.06
442
3,062
1,841
793
34
Xiaodan
at what three stages of the audit MAY we
perform Analytical Procedures ?
at what stages of the audit are we required
to perform Analytical Procedures?
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req’d planning phase
substantive tests
req’d at conclusion as an overall review
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AU-C Section 520*
Analytical Procedures
Source: SAS No. 122.
Effective for audits of financial statements for periods ending on or after
December 15, 2012.
Introduction
Scope of This Section
.01 This section addresses the auditor's use of analytical procedures as substantive
procedures (substantive analytical procedures). It also addresses the auditor's
responsibility to perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion on the financial statements. Section
315, Understanding the Entity and Its Environment and Assessing the Risks of
Material Misstatement, addresses the use of analytical procedures as risk
assessment procedures (which may be referred to as analytical procedures used to
plan the audit).1 Section 330, Performing Audit Procedures in Response to
Assessed Risks and Evaluating the Audit Evidence Obtained, addresses the nature,
timing, and extent of audit procedures in response to assessed risks; these audit
procedures may include substantive analytical procedures
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interim
A
auditing
B
fall 2015
date report issued
end of field work
report date
12/31/15
C
D
38
Contingent Liabilities / Attorney’s Letter
Subsequent Events
Management Representations
analytical procedures
Final assessment of audit risk - opinion
communications to audit comm or mgmt
• AU-c 260 Communication with Those Charged
with Governance
• AU-c 265 Communicating Internal Control
Related Matters Identified in an Audit
subsequent discovery of facts
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Jake M
what is the definition of audit risk?
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material
.05
0
known
misstatement
from samples
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projected
uncorrected
misstatements
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final review of workpapers
• all accounting and auditing questions have been
resolved
• support the auditor’s opinion
• provide evidence the audit complied with GAAS
• means of coordinating and supervising the audit
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Dillon
who is an “independent reviewer?”
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dual dating
events that occur between the end of
field work (the report date) and the date
the report is issued
extend field work or
dual date
page 353
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dual dating
p. 353
Hewlett-Packard has an October 31 year end
Ernst & Young completed field work on November 13th
On Dec. 6, 2001, Hewlett-Packard made a $1 billion dollar debt
offering, which it disclosed in Note 19 in its financial statements.
This is how Ernst & Young dated its auditor’s report
November 13, 2001, except for Note 19, as to which the date is
December 6, 2001.
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interim
A
auditing
B
fall 2015
date report issued
end of field work
report date
12/31/15
C
D
47
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communication with audit committees
• The auditor’s responsibilities
• An overview of the scope of the audit
– Approach to address significant risks
• Corrected misstatements
• Accounting practices & estimates
• Difficulties & disagreements with
management
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management letter
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Deficiency in internal control. A deficiency in internal control
exists when the design or operation of a control does not allow
management or employees, in the normal course of performing
their assigned functions, to prevent, or detect and correct,
misstatements on a timely basis. A deficiency in design exists when
(a) a control necessary to meet the control objective is missing, or
(b) an existing control is not properly designed so that, even if the control operates as
designed, the control objective would not be met. A deficiency in operation exists when a
properly designed control does not operate as designed or when the person performing the
control does not possess the necessary authority or competence to perform the control
effectively.
Material weakness. A deficiency, or a combination of deficiencies,
in internal control, such that there is a reasonable possibility that a
material misstatement of the entity's financial statements will not be
prevented, or detected and corrected, on a timely basis.
Significant deficiency. A deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness yet important enough to merit attention by those charged
with governance.
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Aleksandr
what is the definition of control risk?
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control risk
the risk that a misstatement in an
assertion about a class of transaction,
account balance, or disclosure and that
could be material, either individually or
when aggregated with other
misstatements, will not be prevented, or
detected and corrected, on a timely
basis by the entity’s internal control.
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Tim
what is a material weakness?
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material weakness
(page 177 )
a significant deficiency in internal
control such that there is a reasonable
possibility that a material misstatement
would not be prevented, or detected
and corrected on a timely basis
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Ian
what two types of control deficiencies
do we report ?
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Janet
to whom do we report deficiencies in
the internal controls ?
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communication of internal control matters
• communicate what
– significant deficiency
– material weaknesses
• communicate to who
– the audit committee
– board of directors
– owners or senior management
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interim
A
auditing
B
fall 2015
date report issued
end of field work
report date
12/31/14
C
D
62
Contingent Liabilities / Attorney’s Letter
Subsequent Events
Management Representations
analytical procedures
Final assessment of audit risk - opinion
communications to audit comm or mgmt
• AU-c 260 Communication with Those Charged
with Governance
• AU-c 265Communicating Internal Control
Related Matters Identified in an Audit
subsequent discovery of facts
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Fischer vs. Kletz,
266 F. Supp. 180 (SDNY 1967),
the auditor did not disclose errors in a
previously issued audit report when (s)he
discovered the errors three months later
during a consulting engagement
an auditor has a duty to anyone still relying
on his report to disclose subsequently
discovered errors in the report
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subsequent discovery of facts
existing at the date of the audit report
the auditor should
a. discuss the matter with management and, when
appropriate, those charged with governance.
b. determine whether the financial statements need
revision and, if so, inquire how management intends to
address the matter in the financial statements.
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subsequent discovery of facts existing at the date of the audit report
.16 If management revises the financial statements, the auditor should
a. apply the requirements of paragraph .
b. if the audited financial statements have been made available to
third parties, assess whether the steps taken …. ensure that anyone
in receipt of those financial statements is informed of the situation,
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subsequent discovery of facts existing at the date of the audit report
.17 If management does not revise the financial statements in circumstances when the auditor
believes they need to be revised, then
a. if the audited financial statements have not been made available to third parties, the auditor should notify management and those charged with governance—unless
all of those charged with governance are involved in managing the entity4—not to make the audited financial statements available to third parties before the necessary
revisions have been made and a new auditor's report on the revised financial statements has been provided. If the audited financial statements are, nevertheless,
subsequently made available to third parties without the necessary revisions, the auditor should apply the requirements of paragraph .17b.
b. if the audited financial statements have been made available to third parties, the auditor
should assess whether the steps taken by management are timely and appropriate to ensure that anyone in receipt
of the audited financial statements is informed of the situation, including that the audited financial
statements are not to be relied upon.
.18 If management does not take the necessary steps to ensure that anyone in receipt of the audited financial statements is
informed of the situation, as provided by paragraphs .16b or .17b, the auditor should notify management and those charged
with governance—unless all of those charged with governance are involved in managing the entity5—that the auditor will seek to prevent future reliance
on the auditor's report. If, despite such notification, management or those charged with governance do not take the necessary steps, the auditor should take
appropriate action to seek to prevent reliance on the auditor's report. (Ref: par. .A23–.A26)
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subsequent discovery of facts existing at the date of the audit report
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end of audit party
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great quarter
Because of You
I enjoyed coming to “work” every day
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congratulations
to our December 2015 grads
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