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,Click to edit Master title style,Click to edit Master text styles,24 -,40,2006 Prentice Hall Business Publishing,Auditing 11/e,Arens/Beasley/Elder,Completing the Audit,Chapter 24,Learning Objective 1,Conduct a review for contingent,liabilities and commitments.,Summary of the Audit Process,Phase I,Plan and design an audit,approach.,Phase II,Perform tests of controls,and substantive tests,of transactions.,Phase III,Perform analytical,procedures and tests,of details of balances.,Phase IV,Complete the audit and,issue an audit report.,Phase IV Completing the Audit,Review for contingent,liabilities.,Review for,subsequent events.,Accumulate final,evidence.,Evaluate results.,Issue audit report.,Communicate with,audit committee,and management.,Contingent Liabilities,A contingent liability is a potential future,obligation to an outside party for an,unknown amount resulting from activities,that have already taken place.,Likelihood of Occurrence and Financial Statement Treatment,Reasonably,possible,Footnote disclosure is,necessary,Probable,(likely to occur),Adjust financial statements,or,note disclosure,Remote,(slight chance),No disclosure,necessary,Likelihood of,occurrence of event,Financial statement,treatment,Auditors Concerns,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,Audit Procedures for Finding Contingencies,Inquire of management (orally and in,writing) about the possibility of,unrecorded contingencies.,Review current and previous years internal,revenue reports for income tax settlements.,Review the minutes of directors and,stockholders meetings for indications,of lawsuits or other contingencies.,Audit Procedures for Finding Contingencies,Analyze legal expenses and review invoices,and statements from legal counsel.,Obtain a letter from each major attorney of the,client as to the status of pending litigation.,Review audit documentation for any information,that may indicate a potential contingency.,Examine letters of credit in force.,Learning Objective 2,Obtain and evaluate letters from,the clients attorneys.,Inquiry of Clients Attorneys,A list including (1) pending threatened litigation,and (2) asserted or unasserted claims or,assessments with which the attorney,has had involvement.,A request that the attorney furnish information,or comment about the progress of each item listed.,Inquiry of Clients Attorneys,A request for the identification of any unlisted,pending or threatened legal action or a,statement that the clients list is complete.,A statement informing the attorney of the attorneys,responsibility to inform management of legal matters,requiring disclosure in the financial statements,and to respond directly to the auditor.,Sarbanes-Oxley Act,Congress included provisions in this act directing,the SEC to issue rules requiring attorneys serving,public companies to report material violations,by the company of federal securities laws.,The American Bar Association amended its,attorney-client confidentiality rules to permit,attorneys to breach confidentiality if a client,is committing a crime or fraud.,Learning Objective 3,Conduct a post-balance-sheet,review for subsequent events.,Period Covered by Subsequent Events Review,Clients ending,balance sheet,date,12-31-05,Date client,issues financial,statements,3-26-06,Audit,report,date,3-11-06,Period to which review for,subsequent events applies,Period for,processing,the financial,statements,Types of Subsequent Events,1,Those that have a direct effect,on the financial statements,and require adjustment,2,Those that have,no,direct effect,on the financial statements but,for which disclosure is advisable,Requiring Adjustment,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,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,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 a consequence of government action,barring further sale of a product,Uninsured loss of inventories as a result,of fire,A merger or an acquisition,Audit Tests,Two categories:,Procedures normally integrated as,a part of the verification of year-end,account balances,Procedures performed specifically for,the purpose of discovering events or,transactions that must be recognized,as subsequent events,Inquire 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,Dual Dating,The first date is the date for the,completion of field work except,for a specific exception.,The second date, which is,always later, deals with,the exception.,Learning Objective 4,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,Management Representation Letter,Purposes:,To impress upon management its responsibility,for the assertions in the financial statements,To document the responses from management,to inquiries about various aspects of the audit,1. Financial statements,2. Completeness of information,3. Recognition, measurement, and disclosure,4. Subsequent events,5. Internal control,Management Representation Letter,1. Managements acknowledgment of its,responsibility for establishing and,maintaining effective internal control,over financial reporting,2. Managements conclusion about the,effectiveness of internal control over,financial reporting as of the end of,the fiscal period,3. Disclosure of all deficiencies,4. Managements knowledge of any fraud,Management Representation Letter: Internal Control,Information Accompanying Basic Financial Statements,Balance sheet,Income statement,Statement of,cash flows,Footnotes,Detailed comparative,statements,Statistical data,Schedule of,insurance coverage,Basic,financial,statements,Standard,auditors,report,Information,accompanying,basic financial,statements,Separate paragraph ,unqualified, qualified,or disclaimer,Learning Objective 5,Integrate the audit evidence,gathered, and evaluate the,overall audit results.,Evaluate Results,Sufficiency of evidence,Evidence supports auditors opinion,Financial statement disclosures,Evaluate Results,Audit documentation review,Independent review,Summary of evidence evaluation,Completing the Engagement Checklist,YESNO,1.Examination of prior years audit,documentation,a.Were last years audit files examined,for areas of emphasis in the,current-year audit?,b.Was the permanent for,items that affect the current year?,Completing the Engagement Checklist,YESNO,2.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?,Completing the Engagement Checklist,YESNO,3.General documents,a.Were all current-year minutes and,resolutions reviewed, abstracted,and followed up?,b.Has the permanent,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 procedures,Sample size,Items to select,Timing,Evaluate results,(by account and cycle),Estimated misstatement,(by account),Achieved audit risk,(by account and cycle),Evaluating Results and Reaching Conclusions,Evaluate overall,financial statements,Estimated misstatement,(overall statements),Achieved audit risk,(overall statements),Issue,audit,report,The audit report is the only thing that most,users see in the audit process, and the,consequences of issuing an inappropriate,report can be severe.,Issue the Audit Report,Learning Objective 6,Communicate effectively with the,audit committee and management.,Communicate fraud and illegal acts,Communicate internal control deficiencies,Other communication with audit committee,Management letters,Communicate with the Audit Committee and Management,Learning Objective 7,Identify the auditors,responsibilities when facts,affecting the audit report are,discovered after its issuance.,Period Covered by Subsequent Events Review,Date client,issues financial,statements,3-26-06,Clients ending,balance sheet,date,12-31-05,Period to which,review for,subsequent,events applies,Period for,processing,the financial,statements,Audit,report,date,3-11-06,Period in which,subsequent,discovery of,facts is made,End of Chapter 24,
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