• Like
Chapter 18, Completing the Audit
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.

Chapter 18, Completing the Audit



  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads


Total Views
On SlideShare
From Embeds
Number of Embeds



Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

    No notes for slide


  • 1. Review for Contingencies (Especially Contingent Losses)
    • Definition – “an existing condition, situation or circumstance involving uncertainty as to possible gain or loss… that will ultimately be resolved when one or more future events occur or fail to occur.”
    • Why focus on contingent losses, rather than gains?
    • GAAP is still specified by SFAS #5 (accruals, disclosure)
    • Audit procedures
      • Inquiries of management and other client personnel (regarding lawsuits, legal exposure, etc.) – corroborate w/ “lawyer’s letter”
      • Read minutes of board meetings
      • Review contracts, loan agreements, etc. (restrictive covenants?)
  • 2. Inquiry of a Client’s Lawyer Concerning Litigation, Claims, & Assessments (SAS 12)
    • Procedures to identify lawyers used
      • Inquire of management (primary source)
      • Vouch to relevant invoices (for legal expenses)
      • Review minutes of board meetings
    • Send “attorney letter” to those lawyers who rendered non-trivial legal services to client -- to corroborate management’s responses to the auditor’s inquiries
  • 3. 2 Categories of Legal Matters Are Important to “Lawyer Letter”
    • About asserted claims & active litigation --lawyer should tell the auditor directly about any omissions of such matters
    • About unasserted claims & potential litigation -- lawyer CANNOT divulge omissions directly to auditors (but should advise client to discuss it with auditors!)
      • Must be probable that claim will be filed
      • Must have at least a reasonable possibility of an unfavorable outcome
  • 4. Review for “Subsequent Events”
    • Definition – after B/S date, before report issued
      • Type I: Require F/S adjustment
      • Type II: Require F/S disclosure
    • Audit procedures
      • Inquiries of management
      • Lawyer’s letter regarding legal issues
      • Read minutes of board meetings
      • Scan journals & ledgers for any “unusual items”
  • 5. “Management Representations” (SAS 85)
    • Must obtain written representations from management to corroborate their responses
      • Addressed directly to the auditors
      • Signed by both the CEO & CFO
      • Dated no later than the date of the audit report (usually the last day of fieldwork)
    • Management’s unwillingness to sign the letter would be a MAJOR scope limitation!
    • The representation letter should cover all periods encompassed by the auditor’s report
  • 6. Specific Representations Depend on the Circumstances -- Usually:
    • Regarding the financial statements
      • Management takes responsibility for the F/S
      • Belief that F/S are consistent with GAAP
    • Regarding completeness of information
      • All financial records made available
      • Minutes complete and made available
      • No communications from regulators about deficiencies related to financial reporting
      • No known material unrecorded transactions
  • 7. Typical Representations (Cont’d)
    • Regarding recognition, measurement, & disclosure
      • No fraud (by mgt or others affecting I/C)
      • No plans affecting carrying values in F/S
      • Related party transactions -- properly reported
      • Contingent losses properly accounted for
      • Significant estimates & material concentrations properly disclosed (Re: AICPA SOP)
      • No violations of laws, regulations or contracts having F/S effects
  • 8. Typical Representations (Cont’d)
    • Regarding recognition, measurement, & disclosure (continued)
      • No unasserted claims or assessments which the client's lawyer has directed management to discuss with the auditors
      • Satisfactory title held to assets; no encumbrances (not used as collateral)
    • Subsequent events -- no events after B/S date warrant adjustment/disclosure to F/S
    • Other circumstances -- as deemed necessary