Ar23 Completing Audit

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 23 - 1

Completing the Audit

Chapter 23


Learning Objective 1

Conduct a review for contingent

liabilities and commitments.


Summary of theAudit Process

Phase I

Phase II

Phase III

Phase IV

Plan and designan audit approach.

Perform tests ofcontrols and

substantive testsof transactions.

Perform analyticalprocedures andtests of detailsof balances.

Complete theaudit and issuean audit report.


Phase IV –Completing the Audit

Review forcontingentliabilities

Review for subsequent events

Accumulatefinal evidence

Evaluate results

Issue audit report

Communicate with audit committeeand management


A contingent liability is potential futureobligation to an outside party for an

unknown amount resulting fromactivities that have already taken place.

Contingent Liabilities


Likelihood of Occurrence and Financial Statement Treatment

Likelihood of Financial StatementOccurrence of Event Treatment

Remote (slight chance) No disclosure necessary

Reasonably possible Footnote disclosure

Probable Adjust financial statementsOR footnote disclosure


• Pending litigation for patent infringement, product liability, or other actions• Income tax disputes• Product warranties• Notes receivable discounted• Guarantees of obligations of others• Unused balances of outstanding letters of credit

Auditor’s Concerns


Audit Procedures forFinding Contingencies

Inquire of management (orally and in writing)about the possibility of unrecorded contingencies.

Review current and previous years’ internalrevenue reports for income tax settlements.

Review the minutes of directors’ and stockholders’meetings for indications of lawsuits.


Audit Procedures forFinding Contingencies

Analyze legal expenses and review invoicesand statements from legal counsel.

Obtain a letter from each major attorney of theclient as to the status of pending litigation.

Examine letters of credit in force.

Review audit documentation for any informationthat may indicate a potential contingency.



Obtain and evaluate letters

from the client’s attorneys.


A list including (1) pending threatened litigation and(2) asserted or unasserted claims or assessmentswith which the attorney has had involvement.

A request that the attorney furnish information orcomment about the progress of each item listed.

Inquiry of Client’s Attorneys


A request for the identification of any unlistedpending or threatened legal action or a statement

that the client’s list is complete.

A statement informing the attorney of the attorney’sresponsibility to inform management of legal mattersrequiring disclosure in the financial statements and

to respond directly to the auditor.

Inquiry of Client’s Attorneys



Conduct a post-balance-sheet

review for subsequent events.


Period Covered bySubsequent Events Review

Client’s endingbalance sheet

date

Auditreportdate

Date clientissues financial

statements

Period to whichreview forsubsequent

events applies

Period forprocessing

the financialstatements

12-31-02 3-11-03 3-26-03


Those that have a direct effect on thefinancial statements and require adjustment

Those that have no direct effect on thefinancial statements but for which

disclosure is advisable

Types of Subsequent Events


• Declaration of bankruptcy by a customer with an accounts receivable balance• Settlement of a litigation at an amount different from the amount recorded on the books

Requiring Adjustment


• Disposal of equipment not being used in operations at a price below the current book value• Sale of investments at a price below recorded cost

Requiring Adjustment


Advisability of Disclosure

• Decline in the market value of securities held for temporary investment or resale• Issuance of bonds or equity securities• Decline in the market value of inventory as consequence of government action barring further sale of a product• Uninsured loss of inventories as a result of fire• A merger or an acquisition


Inquiry of management Correspond with attorneys Review internal statements prepared subsequent to the balance sheet date Review records prepared subsequent to the balance sheet date Examine minutes issued subsequent to the balance sheet date Obtain a letter of representation

Audit Tests


The first date is the date for the completionof field work except for a specific exception.

The second date, which is always later,deals with the exception.

Dual Dating



Design and perform the final steps

in the evidence-accumulation

segment of the audit.


1. Perform final analytical procedures.2. Evaluate the going-concern assumption.3. Obtain a management representation letter.4. Consider information accompanying the

basic financial statements.5. Read other information in the annual report

Final Evidence Accumulation


Information Accompanying Basic Financial Statements

Balance sheetIncome statement

Statement ofcash flows

Footnotes

Basicfinancialstatements

Standardauditor’s

report


Information Accompanying Basic Financial Statements

Detailedcomparativestatements

Statistical data

Schedule ofinsurancecoverage

Informationaccompanyingbasic financialstatements

Separateparagraph –unqualified,

qualified,or disclaimer



Integrate the audit evidence

gathered, and evaluate the

overall audit results.


Sufficiency of evidence

Evidence supports auditor’s opinion

Financial statement disclosures

Audit documentation review

Independent review

Evaluate Results

Summary of evidence evaluation


YES NO1. Examination of prior year’s audit

documentationa. Were last year’s audit files examined

for areas of emphasis in the current-year audit? ___ ___

b. Was the permanent file reviewed for items that affect the current year? ___ ___

Completing theEngagement Checklist


YES NO2. Internal control

a. Has internal control been adequately understood? ___ ___

b. Is the scope of the audit adequate in light of the assessed control risk? ___ ___

c. Have all major weaknesses been included as reportable conditions in a letter to the audit committee or to senior management? ___ ___



YES NO3. General documents

a. Where all current-year minutes and resolutions reviewed, abstracted, and followed up? ___ ___

b. Has the permanent file been updated? ___ ___c. Have all major contracts and

agreements been reviewed and abstracted and copied with all existing legal requirements? ___ ___



Evaluating Results and

Reaching Conclusions

Actual audit evidence(by cycle, account,

and objective)

Audit proceduresSample size

Items to selectTiming

Evaluate results(by account and cycle)

Estimated misstatement(by account)

Achieved audit risk(by account and cycle)


Evaluating Results and

Reaching Conclusions

Evaluate overallfinancial statements

Estimated misstatement(overall statements)Achieved audit risk(overall statements)

Issueauditreport


The audit report is the only thing that most userssee in the audit process and the consequences of

issuing an inappropriate report can be severe.

Issue the Audit Report



Communicate effectively with the

audit committee and management.


Communicate fraud and illegal actsCommunicate reportable conditionsOther communication with audit committeeManagement letters

Communicate with the Audit Committee and Management



Identify the auditor’s

responsibilities when

facts affecting the audit

report are discovered

after its issuance.


Period Covered bySubsequent Events Review

Client’s endingbalance sheet

date

Auditreportdate

Date clientissues financial

statements

Period to whichreview forsubsequent

events applies

Period forprocessing

the financialstatements

12-31-02 3-11-03 3-26-03

Period in whichsubsequent

discovery offacts is made


End of Chapter 23

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Ar23 Completing Audit