Chapter 17

Completing the Audit

Engagement

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Review for Contingent Liabilities

A contingent liability is defined as an existing

condition, situation, or set of circumstances

involving uncertainty as to possible loss to an entity

that will ultimately be resolved when some future

event occurs or fails to occur.

Probable: The future event is likely to occur.

Reasonably Possible: The chances of the

future event occurring is more than remote

but less than probable.

Remote: The chance of the future event

occurring is slight.

Examples

• Pending or threatened litigation

• Actual or possible claims and

assessments

• Income tax disputes

• Product warranties or defects

• Guarantees of obligations to

others

• Agreements to repurchase

receivables that have been sold

LO# 1

17-2

Audit Procedures for Identifying

Contingent Liabilities Read minutes of meetings

of the board of directors,

committees of the board,

and stockholders.

Review contracts, loan

agreements, leases, and

correspondence from

government agencies.

Confirm or otherwise

document guarantees and

letters of credit.

Inspect other documents for

possible guarantees or

other similar arrangements.

Review tax returns, IRS

reports, and schedules

supporting the client’s

income tax liability.

LO# 2

17-3

Legal Letters

A letter of audit inquiry (legal letter) sent to the

client’s attorneys is the primary means of

obtaining or corroborating information about

litigation, claims, and assessments.

LO# 3

17-4

Commitments

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 footnote to the

financial statements.

Long-term contracts to purchase

raw materials or sell their

products at a fixed price

To obtain a favorable

pricing arrangement

To secure the

availability of raw

materials

LO# 4

17-5

Review for Subsequent Events for

Audit of Financial Statements Balance

Sheet Date

Type I Event

Conditions existed

before the balance

sheet date and affect

estimates that are part

of financial statements

Type II Event

Conditions did not

exist at the balance

sheet date and do not

affect the accuracy of

the financial statements

Require adjustment of

the financial

statements

Require disclosure and

possibly pro forma

financial statements

LO# 5

17-6

Dual Dating When a subsequent event is recorded or disclosed

in the financial statements after sufficient,

appropriate audit evidence has been obtained

but before the issuance of the financial

statements, the auditor considers the following

options for dating of the auditor’s report:

(1) “Dual date” the report (original date of report

plus date of subsequent event—limits liability)

(2) Change the date of the auditor’s report to the

date of the subsequent event—extends liability

LO# 6

17-7

Audit Procedures to Look for

Subsequent Events

Inquire of

Management

Read Interim

Financial

Statements

Examine the

Books of

Original Entry

Examples of audit

procedures

Read Minutes

of Meetings

Inquire of

Legal Counsel

LO# 7

17-8

Review of Subsequent Events for Audit of

Internal Control over Financial Reporting

Auditors of public companies are responsible to

report on any changes in internal control that might

affect financial reporting between the end of the

reporting period and the date of the auditor’s report.

LO# 7

Internal audit

reports

Independent

auditor reports

of reportable

conditions

Regulatory

agency reports

on ICFR

Information

obtained from

audit of ICFR

17-9

Final Evidential

Evaluation Processes

Perform final analytical

procedures.

Evaluate entity’s ability

to continue as a going

concern.

Obtain a

representation letter.

Review working

papers.

Assess final audit

results.

Evaluate financial

statement presentation

and disclosure.

Obtain an independent

review of the

engagement.

LO# 8

17-10

Going Concern Considerations

LO# 9

17-11

Communications with “Those

Charged with Governance”

LO# 10

17-12

Subsequent Discovery of Facts Existing

at the Date of the Auditor’s Report

Notify the client that the

auditor’s report must no

longer be associated with

the financial statements.

Notify any regulatory

agency having jurisdiction

over the client that the

auditor’s report can no

longer be relied upon.

Notify each person known

to the auditor to be relying

on the financial statements.

LO# 11

17-13

End of Chapter 17

17-14