Chapter 24
Completing the Audit
Presentation Outline
I. Review for Contingent Liabilities
II. Review for Subsequent Events
III. Accumulate Final Evidence
IV. Evaluate Results
V. Issue Audit Report
VI. Communicate with Audit Committee and
Management
VII. Subsequent Discovery of Facts
I. Review for Contingent Liabilities
A. Contingent Liability Conditions
B. Likelihood of Occurrence and Financial
Statement Treatment
C. Commitments
D. Common Audit Procedures for Contingencies
E. Inquiry of Client’s Attorney
F. Sarbanes-Oxley and Attorneys
A. Contingent Liability Conditions
Three conditions are required
for a contingent liability to
exist:
 There is a potential future
payment to an outside party
or the impairment of some
other asset that would
result from an existing
condition.
 There is uncertainty about
the amount of the future
payment or impairment.
 The outcome will be
resolved by some future
event(s).
Note: Page 712 contains examples of possible contingencies.
B. Likelihood of Occurrence and Financial
Statement Treatment
Likelihood of Occurrence
of Event
Financial Statement Treatment
Remote (slight chance)
No disclosure is necessary
Reasonably possible
(more than remote, but
less than probable)
Footnote disclosure is necessary
Probable (likely to occur)
If the amount can be reasonably
estimated, financial statement
accounts are adjusted.
If the amount cannot be
reasonably estimated, footnote
disclosure is necessary.
C. Commitments
 In a commitment, the most
important characteristic is
the agreement to commit
the firm to a set of fixed
conditions in the future
regardless of what happens
to profits or the economy as
a whole.
 All commitments are
ordinarily either described
together in a separate
footnote or combined in the
contingencies footnote.
D. Common Audit Procedures for
Contingencies
Inquire of client management about unrecorded
contingencies.
Review current and prior year revenue agent
reports for income tax settlements.
Review of board of director minutes.
Analysis of legal expense and related invoices
from legal counsel.
Obtain a letter from client’s legal counsel.
Review of bank confirmations and notes.
E. Inquiry of Client’s Attorney
The standard inquiry to the client’s attorney should include
the following:
 A list including (1) pending threatened litigation and (2)
asserted and unasserted claims with which the attorney
as had significant involvement.
 A request that the attorney furnish information about the
progress of each item listed.
 A request for the identification of any unlisted pending
or threatened legal actions or a statement that the client’s
list is complete.
 A statement informing the attorney of their
responsibility to inform client management of legal
matters requiring disclosure in the financial statements
and to respond directly to the auditor.
Note: Page 715 contains an example of the letter.
F. Sarbanes-Oxley and Attorneys
The American Bar Assoc.
has amended the
attorney-client
confidentiality rules to
permit breach of
confidentiality for
crime and fraud of
an audit client.
The Sarbanes-Oxley Act
directed the SEC to issue rules
requiring attorneys to report
material violations of the federal
securities laws to the chief legal
officer, CEO, and possibly the
audit committee.
Previously, attorneys only
reported crimes when there was
a threat of physical harm or
death or the release of
hazardous materials or defective
products.
II. Review for Subsequent Events
A. Time Period of Auditor Responsibility
B. Subsequent Events Requiring Adjustment
C. Subsequent Events Requiring Disclosure
D. Audit Tests for Subsequent Events
E. Dual Dating for Subsequent Events
A. Time Period of Auditor Responsibility
The auditor’s responsibility for reviewing subsequent events is
normally limited to the period beginning with the balance
sheet date and ending with the date of the auditor’s report.
Client’s ending
Audit
Date client
balance sheet
report issues financial
date
date
statements
12-31-02
3-11-03
Period to which
review for
subsequent
events applies
3-26-03
Period for
processing
the financial
statements
B. Subsequent Events Requiring Adjustment
Subsequent events require
financial statement
adjustment if they
provide additional
information regarding
conditions that:
Existed at the balance
sheet date, and
Affect the fair
presentation of account
balances.
C. Subsequent Events Requiring Disclosure
Subsequent events of this
type provide evidence
of conditions that did
not exist at the balance
sheet date, but are so
significant that they
require disclosure.
Page 718 provides
some examples.
D. Audit Tests for Subsequent Events
 Inquiry of key client
management.
 Correspondence with
attorneys
 Review of internal client
statements and other
records prepared
subsequent to the balance
sheet date
 Examine minutes of board
of director meetings
 Obtain a letter of
representation from client
management
E. Dual Dating for Subsequent Events
Occasionally, the auditor determines that an
important subsequent event occurred after the field
work was completed but before the audit report
was issued.
The auditor may chose to (1) extend the date of
field work to cover the discovery, or (2) issue a
dual-dated audit report. For this 2nd option, the
first date would be for the completion of field
work except for a specific exception. The next
date would cover the date of the discovery of the
subsequent event after the field work date.
III. Accumulate Final Evidence
A. Perform Final Analytical Procedures
B. Evaluate Going-Concern Assumption
C. Obtain Client Management Representation Letter
D. Consider Information Accompanying the Basic
Financial Statements
E. Read Other Information in the Annual Report
A. Perform Final Analytical Procedures
Analytical procedures
done during the
completion of the
audit are useful as:
A final review for
material misstatements
or financial problems
not noted during other
testing.
Providing a final
objective look at the
financial statements.
B. Evaluate Going-Concern Assumption
SAS 59 requires the
auditor to evaluate
whether there is
substantial doubt
about a client’s ability
to continue as a going
concern for at least
one year beyond the
balance sheet date.
C. Obtain Client Management Representation
Letter
SAS 85 requires the auditor to obtain a letter of
representation documenting client management’s most
important oral representations during the audit.
Refusal to furnish the letter would require a qualified
opinion or disclaimer of opinion.
SAS 85 and PCAOB Standard 2 suggest categories of
specific matters that should be included in the letter. See
pages 721-722.
D. Consider Information Accompanying the
Basic Financial Statements
In many cases, the auditor
has not performed a
sufficiently detailed
audit to justify an
opinion on the additional
information. Two types
of opinions are allowed:
 A positive opinion
indicating a high level of
assurance.
 A disclaimer indicating
no assurance.
Note: Page 723 contains examples of report wording.
E. Read Other Information in the Annual
Report
 SAS 8 requires the auditor to
read other information
included in annual reports
pertaining directly to the
financial statements.
 Examples are the president’s
letter and explanations of
company activities.
 If the client refuses to modify
material inconsistencies, the
auditor should add an
explanatory paragraph to the
audit report or withdraw
from the engagement.
IV. Evaluate Results
A. The Sufficiency of Audit Evidence
B. Support for the Auditor’s Opinion
C. Financial Statement Disclosures
D. Audit Documentation Review
E. Independent Review
F. Summary of Evidence Evaluation
A. The Sufficiency of Audit Evidence
As an aid in drawing final
conclusions about the adequacy
of the audit evidence, auditors
often use a completing the
engagement checklist (See
Figure 24-5 on page 724).
The auditor has two choices if
sufficient evidence has not been
obtained:
Obtain additional evidence
Issue a qualified or
disclaimer of opinion
B. Support for the Auditor’s Opinion
 It is necessary to combine
individually immaterial
misstatements to evaluate
whether the combined amount
is material. (See Figure 24-6
on page 725)
 The auditor has two choices if
the financial statements are
not fairly stated:
 Have statements revised to
auditor satisfaction.
 Issue a qualified or adverse
opinion.
C. Financial Statement Disclosures
 Adequate disclosure includes
consideration of all of the
statements, including the
related notes.
 Account balance verification
also includes consistent
application of GAAP with the
preceding year.
 Many CPA firms require the
completion of a financial
statement disclosure checklist.
(See Figure 24-7 on page 727)
D. Audit Documentation Review
The review of audit
documentation generally
involves three increasing
levels of personnel, ending
with the partner in charge
of the audit. Three main
reasons for review include:
 Evaluation of performance
of inexperienced personnel
 Ensure that audit meets
CPA firm’s standard of
performance.
 Counteract bias in auditor
judgment.
Partner
Auditor
Manager
Auditor
Senior
Auditor
E. Independent Review
At the completion of larger
audits, it is common to have
the financial statements and
the entire set of audit files
reviewed by a completely
independent reviewer who
has not participated in the
engagement.
A independent review is
required for SEC
engagements.
Reviewer takes an adversary
position.
F. Summary of Audit Evidence
Auditor evaluates the sufficiency of audit evidence by
first evaluating achieved audit risk, by account and by
cycle, and then making the same evaluation for the
overall financial statements.
Auditor also (often simultaneously) evaluates whether
the evidence supports the audit opinion by first
estimating misstatements in each account and then for
the overall financial statements.
V. Issue the Audit Report
The auditor should not
decide the appropriate audit
report until all evidence has
been accumulated and
evaluated.
Because the audit report is
the only thing that many
users see in the audit
process and the
consequences of issuing an
inappropriate report can be
severe, it is critical that the
report be correct.
VI. Communicate with the Audit Committee
and Management
A. Audit Committee Communication
B. Management Communication
A. Audit Committee Communication
 SAS 99 and SAS 54 require the
auditor to communicate all fraud
and illegal acts to the audit
committee, regardless of
materiality.
 Auditor must also communicate
significant deficiencies and
material weaknesses in the design
or operation of internal control.
 SAS 61 states that certain major
items be communicated to the
audit committee for all SEC
engagements and other audits
where there is an audit committee
or similarly designated body.
(See page 729)
B. Management Communication
A management letter is
intended to inform client
personnel of the CPA’s
recommendations for
improving any aspect of the
client’s business.
A management letter is
optional and is intended to
help the client operate its
business more effectively.
VII. Subsequent Discovery of Facts
If the auditor becomes aware after the financial statements have been
issued to some information included in the statements is materially
misleading, the auditor has an obligation to make certain that users
who are relying on the financial statements are informed about the
misstatements.
 Request the client to issue an immediate revision of the financial statements
containing an explanation of the reasons.
 Client should inform the SEC and other regulatory agencies of the misleading
financial statements.
 If the client refuses to cooperate, the auditor must inform the board of directors.
Auditor must also notify regulatory agencies and, when practical, each person who
relies on the financial statements, that the statements are no longer trustworthy.
Summary of the Audit Process
Plan and design
Phase I
an audit approach.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Perform analytical
procedures and
Phase III
tests of details
of balances.
Phase IV
Complete the
audit and issue
an audit report.
Phase IV –
Completing the Audit
Review for
contingent
liabilities
Review for
subsequent events
Accumulate
final evidence
Evaluate results
Issue audit report
Communicate with
audit committee
and management