17-1
Chapter Seventeen
Completing the Engagement
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17-2
Contingency
A contingency is a liability that is uncertain
because the possible outflow of resources from
the entity will ultimately be resolved when some
future event occurs or fails to occur.
Probable: The future event is likely to occur.
Examples
Neither probable nor remote: The chance of
the future event occurring is less than likely
but more than slight (remote).
• Pending or threatened litigation;
Remote: The chance of the future event
occurring is slight.
• Income tax disputes;
• Actual or possible claims and
assessments;
• Product warranties or defects;
• Guarantees of obligations to
others;
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• Agreements to repurchase
receivables
that have been sold.
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17-3
Audit Procedures for Identifying
Contingencies
Read minutes of meetings
of those charged with
governance, e.g. the board
of directors.
Review contracts, loan
agreements, leases and
correspondence from
government agencies.
Review income tax liability,
tax returns and tax
authorities’ reports.
Confirm or otherwise
document guarantees and
letters of credit.
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Inspect other documents for
possible guarantees.
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17-4
Audit Procedures for Identifying
Contingencies
Specific Audit Procedures Conducted Near
Completion of Audit
Inquiry and discussion with
management about its policies and
procedures for identifying,
evaluating and accounting for
contingencies.
Examine documents in the entity’s
records such as correspondence
and invoices from lawyers for
pending or threatened lawsuits.
Obtain a legal letter that describes
and evaluates any litigation, claims,
or assessments.
Obtain written representation from
management that all litigation,
asserted and unasserted claims,
and assessments have been
disclosed in accordance with the
applicable financial reporting
framework.
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17-5
Legal Letters
A letter of audit inquiry (a legal letter) sent to the
client’s lawyers is the primary means of
obtaining or corroborating information about
litigation, claims, and assessments.
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17-6
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17-7
Commitments
Long-term contracts to purchase
raw materials or sell their
products at a fixed price.
To obtain a
favourable pricing
arrangement.
To secure the
availability of raw
materials.
Long-term commitments are usually identified through inquiry of client
personnel during the audit of the revenue and purchasing processes. In
most cases, such commitments are disclosed in a note to the financial
statements.
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17-8
Review for Subsequent Events for
Audit of Financial Statements
Balance
Sheet Date
Type I Event
Type II Event
Affects estimates
that are part of
financial
statements.
Conditions did
not exist at the
balance sheet
date.
Require adjustment of
the financial
statements.
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Require financial
statement disclosure.
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17-9
Review for Subsequent Events for
Audit of Financial Statements
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Subsequent Events Recorded or
Disclosed after the Date of the Audit
Report but before the Issuance of the
Financial Statements
17-10
The auditor is not responsible for making
any inquiries or conducting any audit
procedures after the date of the audit
report.
However, subsequent events may come to
the auditor’s attention after the date of the
audit report but before the issuance of the
financial statements, requiring adjustment
or disclose in the financial statements.
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Subsequent Events Recorded or
Disclosed after the Date of the Audit
Report but before the Issuance of the
Financial Statements
17-11
When a subsequent event is recorded or
disclosed in the financial statements after
the date of the audit report but before the
issuance of the financial statements, the
auditor provides a new audit report on the
amended financial statements.
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17-12
Audit Procedures for Subsequent
Events
Review
Management
Procedures
Inquire of
Management
Examples of
Read Interim
audit procedures
Financial
Statements
Examine the
Read Minutes
Books of
of Meetings
Original Entry
Obtain
Inquire of
Management
Legal Counsel
Representatio
n Letter
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17-13
Final Evidence Evaluation Processes
Perform final analytical
procedures.
Evaluate entity’s ability
to continue as a going
concern.
Obtain a
representation letter.
Review working
papers.
Final assessment of
audit results.
Evaluation of financial
statement presentation
and disclosure.
Obtain an independent
review of the
engagement.
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17-14
Going-Concern Considerations
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17-15
Going-Concern Considerations
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17-16
Going-Concern Considerations
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17-17
Proposed Adjusting Entries
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17-18
Independent Engagement Quality Review
An engagement quality control review is an
objective evaluation of the significant judgments
made by the engagement team and the conclusions
reached in formulating the auditor’s report.
Auditing standards (ISA 220) require for the audit of
financial statements of listed companies that the
engagement partner appoints an engagement
quality control reviewer.
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17-19
Archiving and Retention
Auditing standards (ISA 230) stipulate that the
auditor prepares audit documentation that is
sufficient and appropriate to provide a record of the
basis for the audit report and to provide evidence
that the audit was performed in accordance with
ISAs and applicable legal and regulatory
requirements.
Legislation and auditing standards require auditors
to retain their audit files for a number of years after
an audit report is filed.
The retention period is ordinarily not shorter than
five years from the date of the audit report.
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17-20
Communication with Those Charged with
Governance
Auditing standards (ISA 260) require that the
auditor communicates to those charged with
governance matters related to the financial
statement audit that are relevant to the
responsibilities of those charged with
governance.
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Facts Existing at the Date of the Auditor’s
Report Discovered after the Issuance of
the Financial statements
The auditor has no
obligation to conduct any
audit procedures after the
financial statements and
the audit report have been
issued.
17-21
The auditor may become
aware of facts, which
existed at the date of the
audit report, that might
have affected the auditor’s
report.
When such facts are encountered, the auditor
should determine whether the facts are reliable
and whether they existed at the date of the audit
report.
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Facts Existing at the Date of the Auditor’s
Report Discovered after the Issuance of
the Financial statements
17-22
When the client refuses to do the
necessary revision of the financial
statements, the auditor must:
Notify the client that the auditor’s
report must no longer be
associated with the financial
statements.
Notify regulatory authorities and
other persons relying on the
auditor’s report that the report can
no longer be relied upon.
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17-23
End of Chapter 17
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