Communications with the audit committee and management.
Subsequent discovery of facts existing at the date of the auditor's report.
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.
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.
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. Review income tax liability, tax returns, and IRS agents’ reports. LO# 2
Audit Procedures for Identifying Contingent Liabilities Inquiry and discussion with management about its policies and procedures for identifying, evaluating, and accounting for contingent liabilities. Examine documents in the entity’s records such as correspondence and invoices from attorneys 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 FASB No. 5. Specific Audit Procedures Conducted Near Completion of Audit LO# 2
Legal Letters A letter of audit inquiry (a legal letter ) sent to the client’s attorneys is the primary means of obtaining or corroborating information about litigation, claims, and assessments. LO# 3
Example of Legal Letter LO# 3
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. LO# 4 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.
Review for Subsequent Events for Audit of Financial Statements Balance Sheet Date Type I Event Affects estimates that are part of financial statements. Type II Event Conditions did not exist at the balance sheet date. LO# 5 Require adjustment of the financial statements. Require disclosure and possibly pro forma financial statements.
EXAMPLES OF THE FIRST TYPE OF EVENT
A loss of an uncollectible account receivable resulting from continued deterioration of its financial condition leading to bankruptcy after the balance sheet date.
The settlement of a lawsuit after the balance sheet date for an amount different from the amount recorded in the year end financial statements.
EXAMPLES OF THE SECOND TYPE OF EVENT
Purchase or disposal of a business.
Sale of a capital stock or bond issue.
Loss of a manufacturing facility or assets resulting from a casualty such as a fire or flood.
Losses on receivables arising from conditions such as a casualty arising subsequent to the balance sheet date.
Review of Subsequent Events for Audit of Financial Statements LO# 5
When a subsequent event is recorded or disclosed in the financial statements after the date on which the auditor has obtained sufficient appropriate audit evidence but before the issuance of the financial statements, the auditor must consider the following options for dating of the auditor’s report:
“ Dual date ” the report (limits liability)
Use the date of the subsequent event.
Audit Procedures 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 Obtain Management Representation Letter LO# 7
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
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. Final assessment of audit results. Evaluation of financial statement presentation and disclosure. Obtain an independent review of the engagement. LO# 8
Estimating Likely Misstatements LO# 8
Going-Concern Considerations LO# 9
Going-Concern Considerations LO# 9
Going-Concern Considerations LO# 9
Auditing standards require that the auditor obtain a representation letter from management
The representation letter is signed by the CEO and CFO.
Management’s refusal to provide a management letter constitutes a scope limitation.
WORKING PAPER REVIEW
All working paper should be reviewed by an audit team member senior to the person preparing the working papers.
The reviewer must ensure that
the audit was properly planned and supervised
the evidence supports the audit objectives tested
the evidence is sufficient for the type of audit report issued.
INDEPENDENT PARTNER REVIEW
Most firm have a policy requiring that a concurring (or Second) partner review the financial statements for publicly traded companies and those financial statements that are expected to be widely distributed.
EVALUATE FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE
The auditor must ensure
that the financial statements comply with GAAP
that there is proper presentation of accounts
there is inclusion of all disclosures
Most CPA firms use some type of financial statement disclosure checklist.
Communications with Audit Committee and Management Auditors are required to communicate to those charged with governance certain matters related to the conduct of the audit. LO# 10 Auditor’s responsibility under GAAS. Significant accounting policies. Management judgments and accounting estimates. Significant audit adjustments. Auditor’s judgments about the quality of the entity’s accounting principles. Disagreements with management. Consultation with other accountants. Major issues discussed with management before the auditor was retained. Difficulties encountered during the audit. Fraud involving senior management and fraud that causes material misstatement of the financial statements.
Archiving and Retention
Sarbanes-Oxley Act and PCAOB’s Documentation Standard
Requires audit firms to archive their public-company audit files for retention within 45 days following the time the auditor grants permission to use the auditor’s report in connection with the issuance of the company’s financial statements.
Retain audit documentation for 7 years from the date of completion of the engagement, as indicated by the date of the auditor’s report, unless a longer period of time is required by law.
Retain all documents that “form the basis of the audit or review.”
Include in the audit file for significant matters any document created, sent, or received, including documents that are inconsistent with a final conclusion. Significant changes in audit plans or conclusions must also be documented.
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