Chapter 14
Completing the Audit
Final Review of the Audit
Contingencies
Collectibility of receivables and loans
Product warranty liability
Threat of exploration of assets in a foreign
country
Litigation, claims, and assessments
Guarantees of debts of others
Obligations of banks under standby letters of
credit.
Final Review of the Audit
• Contingencies (cont.)
Agreements to repurchase receivables that have
been sold
Purchase and sale commitments.
•Responsibilities Related to Contingencies
•Sources of Evidence of Contingencies
•Letter of Audit Inquiry
•Effect of audit contingency on audit report.
Adequacy of Disclosure
 Disclosure can be on the face of the financial
statements
Classifications
Parenthetical notations
Footnote
 Disclosures must be adequate
Management
Representation Letter
Auditor should obtain at the end of the audit
Management refusal is considered a scope
limitation sufficient to preclude an
unqualified opinion
Purposes
• Reminds management of responsibility for the
financial statements
• Confirms oral responses
• Reduces possibility of misunderstandings
Management Letter
 Letter from auditor to the management with
constructive observations
 DO NOT CONFUSE WITH MANAGEMENT
REPRESENTATION LETTER.
Not required but seen as value-added auditing
Going Concern
Auditors are required to evaluate likelihood of
going concern.
Evaluation made based on information obtained
from normal audit procedures
Indicators of problems
• Negative trends
• Internal matters
• External matters
• Other matters (bankruptcy prediction models)
Going Concern
Mitigating Factors
Effects on the financial statements
Effects on the Audit Report
Review of Major Estimates
• Responsible for providing reasonable
assurance that
Management has info system to develop
estimates
 Estimates are reasonable
 Estimates presented in conformance with GAAP
Analytical and Quality
Review
• Revenue and expenses
• Final review stage
• adequacy of evidence
• unusual or unexpected balances
• adequacy of disclosure
• Internal Quality Review Process
• Concurring partner or cold review
Communicating with the Audit
Committee
• Processes for making sensitive estimates
• Significant audit adjustments
• Major accounting and reporting disagreements
• Management’s discussion with other CPA firms
• Difficulties encountered in performing the audit
• Significant fraud or other illegal acts
• Significant deficiencies in internal control
• Any independence issues
Subsequent Events
Two types of events identified as subsequent
I
Type I conditions that existed at the balance
sheet date
• Major company files bankruptcy
• Lawsuit settled for different than accrual
• Stock dividend or split
• Sale of inventor below carrying value
Subsequent Events
II Type II subsequent events
• Uninsured casualty
• Significant lawsuit
• Natural disaster
• Major decisions such as a merge
• Material change in value of investments
Subsequent Events
Audit Procedures
 Read minutes of meetings
 Read interim financial statements
 Inquire of management concerning
• significant changes in interim statements
• significant contingent liabilities
• significant changes in working capital, long
term debt or owners equity
• status of tentative items
• unusual adjustments
Subsequent Events
Procedures (cont)
• Inquire of management and legal counsel
concerning contingencies.
• Obtain Management Representation Letter
Subsequent Events
Dual Dating
When an event occurs after the end of
fieldwork but before issuance of the audit
report there are two options.
1) use the date of event as date of report
2) Dual Date the report, use the dates of
end of fieldwork and the event.
Subsequent Events
Subsequent discovery of facts existing at the
date of the auditor’s report
Auditor must determine
 Reliability of new information
 Whether the event had occurred by the
report date
 Whether users are likely to be relying on
statements
 Whether the audit report would have been
affected had the facts been known
Subsequent Events
Subsequent discovery of facts existing at the
date of the auditor’s report
Actions
Revise financial statements
Explanation in subsequent statements
If revising must notify users.
Consideration of Omitted Procedures after the
Report Date