Contingency A contingency is a liability that is uncertain because the possible outflow of resources from the entity will ultimately be resolved when some future event occurs or fails to occur. Probable: The future event is likely to occur. Neither probable nor remote: The chance of the future event occurring is less than likely but more than slight (remote). Remote: The chance of the future event occurring is slight. <ul><li>Examples </li></ul><ul><li>Pending or threatened litigation; </li></ul><ul><li>Actual or possible claims and assessments; </li></ul><ul><li>Income tax disputes; </li></ul><ul><li>Product warranties or defects; </li></ul><ul><li>Guarantees of obligations to others; </li></ul><ul><li>Agreements to repurchase receivables that have been sold. </li></ul>
Audit Procedures for Identifying Contingencies Read minutes of meetings of those charged with governance, e.g. the board of directors. 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 tax authorities’ reports.
Audit Procedures for Identifying Contingencies Inquiry and discussion with management about its policies and procedures for identifying, evaluating and accounting for contingencies. Examine documents in the entity’s records such as correspondence and invoices from lawyers 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 the applicable financial reporting framework. Specific Audit Procedures Conducted Near Completion of Audit
Legal Letters A letter of audit inquiry (a legal letter ) sent to the client’s lawyers is the primary means of obtaining or corroborating information about litigation, claims, and assessments.
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 note to the financial statements. Long-term contracts to purchase raw materials or sell their products at a fixed price. To obtain a favourable 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. Require adjustment of the financial statements. Require financial statement disclosure.
Review for Subsequent Events for Audit of Financial Statements
Subsequent Events Recorded or Disclosed after the Date of the Audit Report but before the Issuance of the Financial Statements The auditor is not responsible for making any inquiries or conducting any audit procedures after the date of the audit report. However, subsequent events may come to the auditor’s attention after the date of the audit report but before the issuance of the financial statements, requiring adjustment or disclose in the financial statements.
Subsequent Events Recorded or Disclosed after the Date of the Audit Report but before the Issuance of the Financial Statements When a subsequent event is recorded or disclosed in the financial statements after the date of the audit report but before the issuance of the financial statements, the auditor provides a new audit report on the amended financial statements.
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 Review Management Procedures
Final Evidence 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.
Independent Engagement Quality Review Auditing standards (ISA 220) require for the audit of financial statements of listed companies that the engagement partner appoints an engagement quality control reviewer. An engagement quality control review is an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the auditor’s report.
Archiving and Retention The retention period is ordinarily not shorter than five years from the date of the audit report. Auditing standards (ISA 230) stipulate that the auditor prepares audit documentation that is sufficient and appropriate to provide a record of the basis for the audit report and to provide evidence that the audit was performed in accordance with ISAs and applicable legal and regulatory requirements. Legislation and auditing standards require auditors to retain their audit files for a number of years after an audit report is filed.
Communication with Those Charged with Governance Auditing standards (ISA 260) require that the auditor communicates to those charged with governance matters related to the financial statement audit that are relevant to the responsibilities of those charged with governance.
Facts Existing at the Date of the Auditor’s Report Discovered after the Issuance of the Financial statements The auditor has no obligation to conduct any audit procedures after the financial statements and the audit report have been issued. The auditor may become aware of facts , which existed at the date of the audit report, that might have affected the auditor’s report. When such facts are encountered, the auditor should determine whether the facts are reliable and whether they existed at the date of the audit report.
Facts Existing at the Date of the Auditor’s Report Discovered after the Issuance of the Financial statements When the client refuses to do the necessary revision of the financial statements, the auditor must: Notify the client that the auditor’s report must no longer be associated with the financial statements. Notify regulatory authorities and other persons relying on the auditor’s report that the report can no longer be relied upon.