Chapter 11
Completing the Integrated Audit
and Reporting
Prepared by Richard J. Campbell
Copyright 2011, Wiley and Sons
Learning Objectives
1. Learn the various topics and steps addressed in the final
phase of an integrated audit, including the integrated
nature of the various procedures and their impacts on both
the ICFR and financial statement audits.
2. Identify the circumstances in which unqualified and other
audit reports are appropriate for ICFR and financial
statement audits.
3. Recognize the content and language of audit reports,
including the different forms used for different situations.
Chapter 11-1
FINAL AUDIT PROCEDURES
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Wrap-up audit procedures include the following:
Audit of unusual year-end transactions
Audit of contingent liabilities and commitments
Inquiry of a client’s lawyer
Obtaining management’s written representations
Subsequent events review
Going concern evaluation
Consideration of other published information
Auditing other financial statements and financial statement
disclosures (continued)
Chapter 11 -2
Learning Objective #1
FINAL AUDIT PROCEDURES
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Wrap-up audit procedures include the following (continued):
Communications
Final review
Review of audit documentation
Engagement quality review
Chapter 11 -3
Learning Objective #1
Overview of an Integrated Audit
EXHIBIT 11-1
Chapter 11 -4
Learning Objective #1
Unusual Year-End Transactions
 Unusual year-end transactions receive particular attention
during final audit steps
 Unusual year-end transactions receive significant auditor
scrutiny because of the risk that they have no real business
purpose.
 One possibility is that unusual year-end transactions are
recorded only because management wants to alter the
financial results presented in the financial statements
Chapter 11 -5
Learning Objective #1
Contingent Liabilities and Commitments
 A contingent liability is a payment or future use
of assets for which a company may become
obligated as a result of conditions existing at the
current time
 The audit procedures are intended to determine
whether the auditor is aware of all contingent
liabilities.
 Commitments are agreements a company has for
future actions, such as to purchase inventory or
execute leases.
Chapter 11 -6
Learning Objective #1
Inquiry of a Client’s Lawyer
 Auditing standards provide guidance for inquiry of an audit
client’s outside legal counsel regarding “litigation, claims,
and assessments” (AU 337).
 The auditor is responsible for obtaining audit evidence
about
• The existence of litigation, claims, and assessments
• The period in which the causal event occurred
• The probability of an outcome resulting in a liability
• An estimate of the possible loss
Chapter 11-7
Learning Objective #1
Audit Procedures Addressing Litigation, Claims and
Assessments
EXHIBIT 11-2
Chapter 11 -8
Learning Objective #1
Content of a Letter of Inquiry to a Client’s Lawyer
EXHIBIT 11-3
Chapter 11 -9
Learning Objective #1
Sample Attorney’s Letter
Chapter 11 -10
Learning Objective #1
Sample of Financial Statement Audit Written Representations
(Part 1)
Chapter 11 - 11
Learning Objective #1
Sample of Financial Statement Audit Written Representations
(Part 2)
Chapter 11 - 12
Learning Objective #1
Financial Statement Audit Written Representations (Part 2)
 A scope limitation exists if the auditor is unable to obtain a
written management representations letter for any reason,
including a refusal on the part of management.
 If the auditor is not able to obtain written management
representations for an integrated audit, the only options are
to:
1. issue a report indicating that an opinion cannot be
provided, or
2. withdraw from the engagement.
Chapter 11 - 13
Learning Objective #1
Management’s Representations for an ICFR Audit
EXHIBIT 11-4
Chapter 11-14
Learning Objective #1
Management’s Representations in a Financial Statement Audit
EXHIBIT 11-5
Chapter 11-15
Learning Objective #1
Management’s Representations in a Financial Statement Audit
EXHIBIT 11-5
Chapter 11-16
Learning Objective #1
Subsequent Events Review
 Discovering information after year end that is
relevant to the prior year’s financial statements or
changes in ICFR is learning of a subsequent
event.
 The first type of subsequent event refers to more
information surfacing about an event that
occurred during the fiscal year being audited on a
condition that existed as of the balance sheet
date. This is called a recognized or Type I
subsequent event.
Chapter 11-17
Learning Objective #1
Subsequent Events Review
 The second type of subsequent event is one that occurs after
the financial statement date but before the date of the audit
report. This is called a nonrecognized or Type II subsequent
event.
 Examples of these types of subsequent events are:
1. Sale of a bond or capital stock issue
2. Purchase of a business
3. Settlement of litigation when the event giving rise to the
claim took place subsequent to the balance sheet date
4. Loss of plant or inventories as a result of fire or flood
Chapter 11-18
Learning Objective #1
Financial Statement Subsequent Events
EXHIBIT 11-6
Chapter 11-19
Learning Objective #1
Subsequent Events
EXHIBIT 11-7
Chapter 11-20
Learning Objective #1
Financial Statement Audit Subsequent Events Procedures
EXHIBIT 11-8
Chapter 11-21
Learning Objective #1
Going Concern
The auditor must evaluate whether an audit
client will continue as a going concern for a
reasonable period of time. The audit standards
define the time period as not longer than one
year after the financial statement date.
Chapter 11-22
Learning Objective #1
Other Published Information
 Various audit steps may be appropriate if a
company produces financial information other
than or in addition to the basic financial
statements.
 If the material inconsistency reflects a problem
with the other information, the auditor asks the
client to revise the other information.
 The auditor often uses a checklist to verify that all
the disclosure requirements are met.
Chapter 11-23
Learning Objective #1
Auditing Financial Statement Disclosures
Chapter 11-24
Learning Objective #1
Auditing the Statement of Cash Flows
Chapter 11-25
Learning Objective #1
Communications
Chapter 11-26
Learning Objective #1
ICFR Communications
EXHIBIT 11-9
Chapter 11-27
Learning Objective #1
Matters to Be Communicated to the Audit Committee
EXHIBIT 11-10
Chapter 11-28
Learning Objective #1
Examples of Wrap-Up Phase Analytical Procedures
Chapter 11-29
Learning Objective #1
Review of Audit Documentation
 AS 3 requires that the auditor prepare an engagement
completion document. This document includes all the
information needed for a reviewer to understand the
significant findings or issues of the audit
 AS 3 also provides guidance regarding the completion date
for audit documentation. All audit procedures must be
complete, and necessary evidence must be obtained before
the audit report date.
 the auditor has a limited additional period of time, 45 days,
to finalize the audit documentation for retention. The end of
the 45-day time period is called the documentation
completion date.
Chapter 11-30
Learning Objective #1
Significant Findings or Issues
EXHIBIT 11-11
Chapter 11-31
Learning Objective #1
Engagement Quality Review
 SOX Section 103 and AS 7 require that audits of public
companies include a review by a concurring or second
partner who is not in charge of the audit engagement. This
independent review is referred to as an engagement quality
review.
Chapter 11-32
Learning Objective #1
REPORTING
 Whenever an auditor is associated with financial
statements, a report needs to be issued.
 The audit report date is “no earlier than the date on which
the auditor has obtained sufficient appropriate evidence to
support the auditor’s opinion” (AS 5.89).
 When new information is learned after the financial statements
are released, the auditor first considers whether the new
information is important to anyone still using the financial
statements and audit report.
Chapter 11-33
Learning Objective #2
Information Discovered between the Audit Completion and
Financial Statement Release Dates
EXHIBIT 11-12
Chapter 11-34
Learning Objective #2
Events and Information after the Fiscal Year End
EXHIBIT 11-13
Chapter 11-35
Learning Objective #2
Reissuing an Audit Report
 A special reporting situation relates to an auditor
reissuing an audit report on a prior year’s
financial statements.
 If the predecessor auditor does not reissue the
audit report for the prior year’s financial
statements, a public company has no choice other
than having the current auditor re-audit the prior
year.
Chapter 11-36
Learning Objective #2
REPORTING ON THE AUDIT OF THE FINANCIAL STATEMENTS
The elements of a report expressing an opinion on the financial statements
of a public company are
a. A title that includes the word independent
b. A statement that the financial statements identified in the report were
audited
c. A statement that the financial statements are the responsibility of the
Company’s management and that the auditor’s responsibility is to
express an opinion on the financial statements based on his or her
audit
d. A statement that the audit was conducted in accordance with
standards of the Public Company Accounting Oversight Board and an
identification of the United States of America as the country of origin of
those standards (continued)
Chapter 11-37
Learning Objective #3
REPORTING ON THE AUDIT OF THE FINANCIAL STATEMENTS
The elements of a report expressing an opinion on the
financial statements of a public company are (continued)
e. A statement that those standards require that the auditor
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement
f. A statement that an audit includes
1. Examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements
2. Assessing the accounting principles used and
significant estimates made by management
3. Evaluating the overall financial statement
presentation
Chapter 11-38
Learning Objective #3
REPORTING ON THE AUDIT OF THE FINANCIAL STATEMENTS
The elements of a report expressing an opinion on the
financial statements of a public company are (continued)
g. A statement that the auditor believes that his or her audit
provides a reasonable basis for his or her opinion
h. An opinion as to whether the financial statements present
fairly, in all material respects, the financial position of the
Company as of the balance sheet date, etc.
i. The manual or printed signature of the auditor’s firm
j. The date of the audit report
An unqualified financial statement audit report is often
referred to as a standard report or clean opinion.
Chapter 11-39
Learning Objective #3
Unqualified Report on the Audit of the Financial Statements of
a Public Company
Chapter 11-40
Learning Objective #3
FINANCIAL STATEMENT AUDIT REPORTS THAT DIFFER FROM UNQUALIFIED,
STANDARD REPORTS
1. The auditor may need to add explanatory language to the report
2. The audit report can also state a qualified opinion. A qualified opinion
report is used when the financial statements are fair “except for” some
matter that is specified in the report
3. An audit report can express an adverse opinion on the financial
statements. An adverse opinion report states that the financial
statements “do not present fairly” the financial position, results of
operations, or cash flows of the company.
4. An auditor can issue a report on the financial statements that disclaims
an opinion.
Chapter 11-41
Learning Objective #3
Opinion Based in Part on the Report of Another Auditor
Chapter 11-42
Learning Objective #3
Substantial Doubt about an Entity’s Ability to Continue as a
Going Concern
Chapter 11-43
Learning Objective #3
Consistency: Change in Accounting Principle
Chapter 11-44
Learning Objective #3
Audit Report
Chapter 11-45
Learning Objective #3
Audit Report
Chapter 11-46
Learning Objective #3
Qualified, Adverse, and Disclaimer Financial Statement
Audit Reports
 When the financial statements do not present the company’s
financial situation and events fairly, the audit report
expresses either a qualified or an adverse opinion.
 A qualified opinion states that, except for the effects of the
matter to which the qualification relates, the financial
statements present fairly, in all material respects, financial
position, results of operations, and cash flows in conformity
with GAAP.
 An adverse opinion is appropriate when the problem is so
pervasive that it prevents the financial statements, as a
whole, from being fairly stated.
Chapter 11-47
Learning Objective #3
Qualified Opinion for a Departure from Generally Accepted
Accounting Principles
Chapter 11-48
Learning Objective #3
Qualified Financial Statement Audit Opinion Because
of a Scope Limitation
Chapter 11-49
Learning Objective #3
Adverse Opinion
Chapter 11-50
Learning Objective #3
Disclaimer of Opinion
Chapter 11-51
Learning Objective #3
REPORTING ON AN AUDIT OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
EXHIBIT 11-15
Chapter 11-52
Learning Objective #3
Audit Reports on ICFR that are not Unqualified
An adverse opinion report on ICFR includes the following:
• The definition of a material weakness
• A statement that a material weakness has been identified
• Identification of the material weakness
• Either a statement that the material weakness is included in
management’s assessment, or that management’s assessment does not
include a description of the material weakness
• If the material weakness is not included in management’s assessment,
a description of the material weakness with specific information about
its nature, and its actual and potential effect on the financial statements
• If the material weakness is included in management’s assessment but
is not fairly presented, a statement that this is the case and a
description of the material weakness
Chapter 11-53
Learning Objective #3
Review Question
PCAOB AS 3, Audit Documentation establishes
a cutoff after which nothing can be removed
from the audit work papers. The cutoff is the
(a) company’s fiscal year end.
(b) field work date.
(c) document completion date.
(d) SEC filing date.
Chapter 11-54
Review Question
To be effective, analytical procedures in the
overall review stage of an audit engagement
should be performed by
(a) a staff-level member of the audit team.
(b) a staff-level member of another audit team.
(c) a manager or partner with knowledge and
understanding of the client’s business and
industry.
(d) the individual who has responsibility for
the firm’s peer review program
Chapter 11-55
Review Question
Analytical procedures used during an audit’s
final review include:
(a) identifying accounts that have not changed
from the prior year and collecting evidence on
them.
(b) retesting control procedures that were
concluded to lack operating effectiveness during
tests of controls.
(c) evaluating account balances that differ from
expected amounts.
(d) performing additional substantive tests on
quantitatively large financial statement
amounts.
Chapter 11-56
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