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Completing the audit

Completing the audit

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Completing the audit

  1. 1. Completing the Audit Chapter 24 ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 1
  2. 2. Learning Objective 1 Conduct a review for contingent liabilities and commitments. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 2
  3. 3. 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 3
  4. 4. 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 4
  5. 5. Contingent Liabilities A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 5
  6. 6. Likelihood of Occurrence and Financial Statement Treatment Likelihood of occurrence of event Remote (slight chance) Reasonably possible Financial statement treatment No disclosure necessary Footnote disclosure is necessary Probable (likely to occur) Adjust financial statements or footnote disclosure ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 6
  7. 7. Auditor’s 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 ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 7
  8. 8. 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 8
  9. 9. 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 9
  10. 10. Learning Objective 2 Obtain and evaluate letters from the client’s attorneys. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 10
  11. 11. Inquiry of Client’s 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 11
  12. 12. Inquiry of Client’s Attorneys A request for the identification of any unlisted pending or threatened legal action or a statement that the client’s list is complete. A statement informing the attorney of the attorney’s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 12
  13. 13. Sarbanes-Oxley Act Congress included provisions in this Act directing the SEC to use 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 13
  14. 14. Learning Objective 3 Conduct a post-balance-sheet review for subsequent events. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 14
  15. 15. Period Covered by Subsequent Events Review Client’s ending balance sheet date 12-31-04 Date client issues financial statements 3-26-05 Audit report date 3-11-05 Period to which review for subsequent events applies Period for processing the financial statements ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 15
  16. 16. 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 ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 16
  17. 17. 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 ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 17
  18. 18. 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 consequence of government action barring further sale of a product  Uninsured loss of inventories as a result of fire  A merger or an acquisition ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 18
  19. 19. Audit Tests  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 ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 19
  20. 20. 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 20
  21. 21. Learning Objective 4 Design and perform the final steps in the evidence-accumulation segment of the audit. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 21
  22. 22. Final Evidence Accumulation 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 22
  23. 23. Letter of Representation 1. Financial statements 2. Completeness of information 3. Recognition, measurement, and disclosure 4. Subsequent events 5. Matters related to reports on internal control required by the Sarbanes-Oxley Act ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 23
  24. 24. Letter of Representation: Internal Control 1. Disclosure of all significant deficiencies 2. Management’s acknowledgment of its responsibility to prevent and detect fraud 3. Knowledge of fraud or suspect fraud 4. Knowledge of any allegations of fraud or suspected fraud Auditors of public companies may obtain a combined representation letter. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 24
  25. 25. Information Accompanying Basic Financial Statements Balance sheet Income statement Statement of cash flows Footnotes Detailed comparative statements Statistical data Schedule of Basic financial statements insurance coverage Standard auditor’s report Information accompanying basic financial statements Separate paragraph – unqualified, qualified or disclaimer ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 25
  26. 26. Learning Objective 5 Integrate the audit evidence gathered, and evaluate the overall audit results. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 26
  27. 27. Evaluate Results Sufficiency of evidence Evidence supports auditor’s opinion Financial statement disclosures ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 27
  28. 28. Evaluate Results Audit documentation review Independent review Summary of evidence evaluation ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 28
  29. 29. YES NO Completing the Engagement Checklist 1. Examination of prior year’s audit documentation a. Were last year’s audit files examined for areas of emphasis in the current-year audit? ___ ___ b.Was the permanent file reviewed for items that affect the current year? ___ ___ ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 29
  30. 30. YES NO Completing the Engagement Checklist 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? ___ ___ ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 30
  31. 31. YES NO Completing the Engagement Checklist 3. General documents a. Were all current-year minutes and resolutions reviewed, abstracted, and followed up? ___ ___ b. Has the permanent file been updated? ___ ___ c. Have all major contracts and agreements been reviewed and abstracted and copied with all existing legal requirements? ___ ___ ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 31
  32. 32. 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) ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 32
  33. 33. Evaluating Results and Reaching Conclusions Evaluate overall financial statements Estimated misstatement (overall statements) Achieved audit risk (overall statements) Issue audit report ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 33
  34. 34. Issue the 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. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 34
  35. 35. Learning Objective 6 Communicate effectively with the audit committee and management. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 35
  36. 36. Communicate with the Audit Committee and Management Communicate fraud and illegal acts Communicate internal control deficiencies Other communication with audit committee Management letters ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 36
  37. 37. Learning Objective 7 Identify the auditor’s responsibilities when facts affecting the audit report are discovered after its issuance. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 37
  38. 38. Period Covered by Subsequent Events Review Date client issues financial statements 3-26-05 Client’s ending balance sheet date 12-31-04 Audit report date Period to which review for subsequent events applies 3-11-05 Period for processing the financial statements Period in which subsequent discovery of facts is made ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 38
  39. 39. End of Chapter 24 ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 39

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