Accounting 4P62

External Auditing II

Section 1

Completing The AuditCICA 3290, 3840, 5405, 6550, 6560

Completing the Audit

Divided into two categories

Contingent liabilities

Subsequent event review

Inquiries of client lawyers

Related party transactions

Client representation letter

Overall analytical review

General review of statement of cash flow

Completion of Field Work Evaluation of Findings

Final assessment of materiality and risk

Formulate opinion on F/S

Complete review of working papers

Technical review of F/S

Internal control weakness communication to client

Management letter

Contingent Liabilities CICA 3290

Three conditions needed:1.2.3.

Three levels of possibility1. likely

2. unlikely

3. not determinable

What do contingent liabilities typically include?

The problem for the auditor?

Notes to the Financial Statements» 1.

» 2.

» 3.

Subsequent Event Review

CICA 6550

Time dimension of subsequent events

B/S Date

Dec. 31 Mar. 1 Mar. 31

End of Field Work

(Report Date)

Report Issuance Date

Subsequent Events Period

Subsequent Events

Type 1» main feature?

Type 2

Types of Subsequent Events

Interim F/S

Enquiry of management

Minutes

Legal counsel

Letter of representation

Audit Tests for Subsequent Events

Inquiries of Client Lawyers

Claims and possible claims may have a material effect on F/S

» auditor’s responsibility?

Obtain form management1.

2.

Letter of audit enquiry to client’s outside legal counsel

ABC Company

123 Main Street

Toronto, Ontario

Dewey, Cheatem, and Howe

Barristers and Solicitors

456 King Street

Hamilton, Ontario

Dear Sir(s):

In connection with the preparation and audit of our financial statements for the fiscal period ended December 31, 200X, we have made the following evaluations of claims and possible claims with respect to which your firm’s advice or representation has been sought:

Description Evaluation

Name of entity, name of other party, nature, amount claimed and current status.

Likelihood of loss (or gain) and estimated amount of ultimate loss (or gain), if any; or indicate that likelihood is not determinable or amount cannot be reasonably estimated.

Would you please advise us, as of March 31, 200Y, on the following points:

(a) Are the claims and possible claims properly described?

(b) Do you consider that our evaluations are reasonable?

(c) Are you aware of any claims not listed above which are outstanding? If so, please include in your response letter the names of the parties and the amount claimed.

This inquiry is made in accordance with the Joint Policy Statement of January 1978 approved by the Canadian Bar Association and the Auditing Standards Committee of the Canadian Institute of Chartered Accountants.

Please address your reply, marked “Privileged and Confidential”, to this company and send a signed copy directly to our auditor, Ace and Co., Chartered Accountants, 789 West Avenue, Toronto, Ontario.

Yours truly

Susan Bleach, President

cc. Ace and Co.

Susan Bleach

Related Party Transactions

CICA 3840

What type of transactions?1.

2.

3.

4.

– Be aware– Apply procedures– Proper accounting and F/S disclosures

Additional procedures:– review minutes– conflict of interest statement– filings

Auditor must:

Client Representation Letter

Objective:– confirm oral representations

– document continuing appropriateness of these representations

– reduce misunderstanding

– F/S responsibility of management

Dated– date of the auditor’s report

1. Acknowledgement of management's responsibility

2. Completeness and availability of data

3. Absence of unrecorded T/As , error, and fraud

4. Compliance with law

5. Existence of related party T/As and contingencies

6. Information concerning subsequent events

7. Management’s plans or intentions

Content of the letter

Overall Analytical Review

Applied to final draft of F/S

– compare F/S subtotals and total with prior year

– calculate relevant ratios

– non-financial data comparison

– common size statements

General Review of Statement of Cash Flow

1. Verify the accuracy of the statement by recalculation.

2. Ascertain that the statement format is the most informative in the circumstances.

3. Ascertain that the statement discloses all important aspects of the company’s operating, financing, and investing activities.

4. Determine that the statement discloses the important sources and uses of cash.

Audit Program WP Ref. Done by Date

Auditor must express an opinion on this F/S

Audit Program

5. Ascertain that the format correctly and prominently shows cash provided from or used by operations and cash provided from or used by extraordinary items.

6. Verify that the statement is based on the balances shown in the audited financial statements at the beginning and end of the period covered by the audit.

7. Establish that the statement of cash flow is presented for each period for which the income statement is presented.

8. Trace, match, or agree statement amounts to like amounts in other financial statements and/or in the working papers.

WP Ref. Done by Date

Final Assessment of Materiality and Audit Risk

Two steps• aggregate errors found during examination

• determine affect on B/S and I/S

Components • uncorrected errors

• projected errors from audit sampling

• estimated errors form other procedures

What is the total of these called?

Determining aggregate errors

ABC Corp.Over/Under

December 31, 200X

Description Current Non-Current Current Non-Current Shareholder EquityASSETS LIABILITIES

Prepared by: D.F.Date:2/12/0YReviewed by: T.L.Date:2/17/0Y

S 1

Uncorrected Known Errors1590 Acc. Depreciation4590 Depn. Expense2995 Income Tax Payable

Overstatement of Depn. Expense D 1

3,500

(1,750)(3,500) 1,750

Uncorrected Projected Errors4200 COGS1200 Inventory2995 Income Tax Payable

Overstatement of Ending Inventory projected from a statistical sample C 1

(8,000)4,000

8,000

(4,000)

Other Estimated Errors 0 0 0 0 0

Aggregate likely error 2% 5% 1% 0% 4%

Final Trial Balance 400,000 735,000 225,000 375,000 535,000

Aggregate likely error (8,000) 3,500 2,250 0 2,250

immaterial

The Opinion on the Financial Statements

Each staff auditor summarizes their own section

Reviewed by audit senior and manager

Who has ultimate responsibility?

Audit meeting with client

Review of Working Papers First level review

Manager review

Partner-in-charge review» work done accurate and thorough» judgements exercised were reasonable» audit completed according to engagement letter» significant questions resolved» working papers support opinion» GAAS have been met

Technical Review of Financial Statements

Publicly held companies

Partner not a member of the audit team

Checklist

Communication of Material Weaknesses

Material weaknesses in internal control» what part of the audit does this result from?

Orally or in writing?

How are such weaknesses communicated?

Management Letter Recommendations for improving the efficiency and

effectiveness of matters observed in the audit

What provides the documentation for the components of the letter?

Includes comments on:» internal control weaknesses» AIS and EDP» management of resources» tax-related matters

I.M. Capable & Co.

Chartered Accountants

Toronto, Ontario

Ms. T.P. Black March 31,200Y

President, ABC Inc.

825 Willowbank Ave.

Toronto, Ontario

Dear Ms. Black:

Our examination of the financial statements of ABC Inc. for the year ended December 31, 200X has disclosed certain opportunities for improvements in your organization and operations. Items that we believe should be brought to your attention are set forth below.

Internal Accounting Control

One individual is both the cashier and custodian of marketable securities. We believe these duties should be segregated between two employees in order to minimize the possibility of unauthorized purchases and sales of marketable securities.

Data Processing

Because of the size of the Company and the widespread geographic location of its operations, we believe you should begin to develop a long-range data processing plan. Without such a plan the Company might find itself in the position of utilizing several service bureaus, developing non-coordinated procedures, or possibly acquiring small pieces of equipment at outlying locations that are not compatible.

Insurance Coverage

The Company presently carries life insurance coverage on the President. We recommend that life insurance coverage be considered for other executives vital to the Company's continued success.

This letter is issued solely for the information of the Company’s management; it should not be presented or quoted to anyone outside the Company. We would be pleased to discuss the matters reported or to answer any questions you may have at your convenience.

Yours very truly,

I.M. Capable

I.M. Capable & Co.

Chartered Accountants

Post-Audit Responsibility

Following the completion of fieldwork

1. Subsequent Events

– between end of field work and issuance of audit report

– CICA 6500, requires audit tests for the event to be extended

Dual Dating» ……December 31, 200X, except for the information

in Note A for which the date is February 6, 200Y.

» In scope and opinion paragraph

Redating» redating the entire report extends the auditor’s

overall responsibility beyond completion of fieldwork to the subsequent event

If client has correctly accounted for it» what does this mean?

» how does this affect the F/S?

CICA 5405» if material, users who rely on the F/S must be informed

Management may decide to» notify users

» issued revised F/S

» advise appropriate agencies

Issuance of a new audit report

2. Subsequent Discovery of Facts» audited F/S already issued

» no audit responsibility

On discovery auditor should:» assess importance of the procedure re the opinion

expressed

» review working papers

If the opinion cannot be supported by the omitted procedure

» what should auditor do?

3. Discovery of Omitted Procedures» after the date of the audit report

» a procedure has been omitted from the examination