Auditing &
Assurance
Services,
6e
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Chapter 11
Completing the Audit
“It ain’t over till it’s over.”
– Yogi Berra, former catcher for the New York Yankees
11-2
Learning Objectives
1.
Identify major activities performed by auditors in completing the
substantive procedures following the date of the financial statements.
2.
Understand the role of attorney letters in evaluating litigation, claims, and
assessments.
3.
Explain why auditors obtain written representations and identify the key
components of written representations.
4.
Identify the final steps in the completion of an audit.
5.
Understand auditors’ responsibility for subsequent events and
subsequently discovered facts.
6.
Identify important activities and communications following the completion
of the audit and audit report release date.
11-3
Timeline for Major Activities
in Audit
Beginning
of year
Year-End Date
(date of the financial
statements)
Interim testing (tests
of controls and
substantive
procedures)
Date of the auditors’ report
(audit completion date)
• Complete substantive
procedures
• Attorney’s letters
• Written representations
• Going-concern assessment
• Adjusting journal entries
• Audit documentation review
• Subsequent events
Subsequently
discovered facts
Audit report
release date
• Subsequently
discovered facts
• Omitted audit
procedures
• Management letter
• Communications
with those charged
with governance
11-4
Procedures Prior to the Audit
Report Release Date
•
•
•
•
•
•
•
•
Completing substantive procedures
Attorney’s letters
Written representations
Going-concern assessment
Adjusting entries
Audit documentation review
Subsequent events
Subsequently discovered facts
11-5
Completing Substantive
Procedures
Roll-forward procedures: Extend work from
interim period to date of the financial
statements
• Include both tests of controls and
substantive procedures
• Performed following date of the financial
statements
• Idea is to obtain evidence through the date
of the financial statements
11-6
Completing Substantive
Procedures
• Analytical procedures: Study of relationships
among financial and nonfinancial data
– Can be used in planning (required), substantive
testing, and near the end of the audit (required)
– Near the end of the audit, analytical procedures
identify unusual or unexpected relationships not
previously identified
• Review accounts for “miscellaneous”, “other,”
and “clearing” accounts (may relate to
earnings management)
11-7
Completing Substantive
Procedures
Accounting estimates:
• Examples include future cash flows in
evaluating asset impairments, allowance
for doubtful accounts for receivables, and
depreciation lives for fixed assets
• Review management’s process for
developing estimates
• Review estimates for reasonableness
11-8
Procedures Prior to the Audit
Report Release Date
•
•
•
•
•
•
•
•
Completing substantive procedures
Attorney’s letters
Written representations
Going-concern assessment
Adjusting entries
Audit documentation review
Subsequent events
Subsequently discovered facts
11-9
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
• Attorney’s letters
11-10
Attorney’s Letters
3
Attorney Letter
(with response)
AUDITORS
Auditors Request
Client to Prepare
Attorney Letter
Attorney
Letter
2
ATTORNEY
1
Sent by
Auditors
CLIENT
11-11
Attorney’s Letters: Responsibilities
• Auditors
– Initiate request for attorney letter
– Send letter to attorney including information related
to litigation, claims, and assessments
• Client
– Prepare listing, description, and evaluation of
litigation, claims, and assessments for letter
• Attorney
– Respond to auditors directly regarding client’s
description of litigation, claims, and assessments
contained in attorney letter
11-12
Attorney’s 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
11-13
Procedures Prior to the Audit
Report Release Date
•
•
•
•
•
•
•
•
Completing substantive procedures
Attorney’s letters
Written representations
Going-concern assessment
Adjusting entries
Audit documentation review
Subsequent events
Subsequently discovered facts
11-14
Written Representations
• Provided by management to auditors
• Dated using date of auditors’ reports (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
11-15
Contents of Written
Representations
• Information related to financial statements
– Management’s responsibility for F/S and internal
control over financial reporting
– Appropriate disclosure, presentation, and
reasonableness of items
– Statement that uncorrected misstatements are
immaterial
• Information provided to auditors by management
• Internal control over financial reporting (for public
entities)
11-16
Procedures Prior to the Audit
Report Release Date
•
•
•
•
•
•
•
•
Completing substantive procedures
Attorney’s letters
Written representations
Going-concern assessment
Adjusting entries
Audit documentation review
Subsequent events
Subsequently discovered facts
11-17
Going-Concern Assessment
• Auditors required to consider whether
evidence obtained during audit raises
questions about ability to continue as a going
concern
• If concerns exist, evaluate management’s
plans to mitigate
– If concerns do not remain: No effect on report or
financial statements
– If concerns remain: Disclose in F/S and modify
auditors’ report
11-18
Adjusting Entries
• Accumulate dollar effects of identified misstatements
• Evaluate 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
• Recommend adjustment of all misstatements identified
• Carry any uncorrected misstatements forward for consideration in
future audits
• Communicate all adjustments and misstatements to audit committee
or individuals charged with governance
11-19
Audit Documentation Review
• Audit supervisor
– Have all steps in audit plan 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
– Is the quality of audit work and reporting consistent with
quality standards of the firm?
– Engagement quality review
11-20
Procedures Prior to the Audit
Report Release Date
•
•
•
•
•
•
•
•
Completing substantive procedures
Attorney’s letters
Written representations
Going-concern assessment
Adjusting entries
Audit documentation review
Subsequent events
Subsequently discovered facts
11-21
Timeline and Terms
Beginning
of year
Year-End Date
(Date of the Financial
Statements)
Date of the auditors’ report
(Audit completion date)
Subsequent
Events
Audit report
release date
Subsequently
Discovered Facts
• Subsequent events occur between the date of the
financial statements and date of the auditors’
report
• Subsequently discovered facts become known
after the date of the auditors’ report
11-22
Procedures to Identify
Subsequent Events
• Obtain understanding of procedures
management performs to identify subsequent
events
• Inquire of management and those charged
with governance
• Read minutes of meetings of owners,
management, and those charged with
governance
• Review entity’s interim financial statements
11-23
Types of Subsequent Events
• Provide new information about conditions
existing at date of the financial statements
– Adjust financial statements to reflect new information
• Involve events that arose following the
date of the financial statements
– Disclose in financial statements
11-24
Subsequently Discovered
Facts
• If discovered prior to audit report release date,
perform procedures related to items
– Revise date of auditors’ reports to reflect new completion
date
– Dual date auditors’ reports
• Following audit report release date: If facts would
result in revision of auditors’ report or F/S and
individuals are relying on F/S
– Notify individuals relying on F/S
– Issue revised F/S which provide disclosure of facts
11-25
Procedures Following Audit
Report Release Date
• Subsequently discovered facts
• Omitted procedures
• Communication with those charged with
governance
• Management letters
11-26
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
11-27
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
11-28
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
11-29
Summary of Audit
Communications
Type
From
To
Timing
Method
Engagement letter Auditors
Client
Before
engagement
Written
Acceptance letter
Client
Auditors
Before
engagement
Written
Attorney letter
response
Attorney
Auditors
Near date of
Written
auditors’ report
Written
representations
Client
Auditors
Date of
Written
auditors’ report
11-30
Summary of Audit
Communications (Continued)
Type
From
To
Timing
Method
Internal control
deficiencies
Auditors
Individuals
charged with
governance
For public
entities, prior
to audit report
release date
Written
Communication
with those
charged with
governance
Auditors
Individuals
charged with
governance
After audit
Oral or
written*
Management
letter
Auditors
Client
After audit
Oral or
written
*If oral communication, document in audit documentation.
11-31