Completing the audit

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 24 - 1

Completing the AuditCompleting the Audit

Chapter 24Chapter 24


Learning Objective 1Learning Objective 1

Conduct a review for contingentConduct a review for contingent

liabilities and commitments.liabilities and commitments.


Summary of the Audit ProcessSummary of the Audit Process

Phase IPhase IPlan and designPlan and design

an audit approach.an audit approach.

Phase IPhase IPlan and designPlan and design

an audit approach.an audit approach.

Phase IIPhase IIPerform tests of controlsPerform tests of controls

and substantive testsand substantive testsof transactions.of transactions.

Phase IIPhase IIPerform tests of controlsPerform tests of controls

and substantive testsand substantive testsof transactions.of transactions.

Phase IIIPhase IIIPerform analyticalPerform analytical

procedures and testsprocedures and testsof details of balances.of details of balances.

Phase IIIPhase IIIPerform analyticalPerform analytical

procedures and testsprocedures and testsof details of balances.of details of balances.

Phase IVPhase IVComplete theComplete the

audit and issueaudit and issuean audit report.an audit report.

Phase IVPhase IVComplete theComplete the

audit and issueaudit and issuean audit report.an audit report.


Phase IV –Phase IV –Completing the AuditCompleting the Audit

Review forReview forcontingentcontingentliabilities.liabilities.

Review forReview forcontingentcontingentliabilities.liabilities.

Review for Review for subsequent events.subsequent events.

Review for Review for subsequent events.subsequent events.

AccumulateAccumulatefinal evidence.final evidence.AccumulateAccumulate

final evidence.final evidence.

Evaluate results.Evaluate results.Evaluate results.Evaluate results.

Issue audit report.Issue audit report.Issue audit report.Issue audit report.

Communicate with Communicate with audit committeeaudit committee

and management.and management.

Communicate with Communicate with audit committeeaudit committee

and management.and management.


Contingent LiabilitiesContingent Liabilities

A contingent liability is potential futureA contingent liability is potential futureobligation to an outside party for anobligation to an outside party for an

unknown amount resulting fromunknown amount resulting fromactivities that have already taken place.activities that have already taken place.

A contingent liability is potential futureA contingent liability is potential futureobligation to an outside party for anobligation to an outside party for an

unknown amount resulting fromunknown amount resulting fromactivities that have already taken place.activities that have already taken place.


Likelihood of Occurrence and Likelihood of Occurrence and Financial Statement TreatmentFinancial Statement Treatment

ReasonablyReasonablypossiblepossible

ReasonablyReasonablypossiblepossible

Footnote disclosureFootnote disclosureis necessaryis necessary

Footnote disclosureFootnote disclosureis necessaryis necessary

ProbableProbable(likely to occur)(likely to occur)

ProbableProbable(likely to occur)(likely to occur)

Adjust financial statementsAdjust financial statementsoror footnote disclosure footnote disclosure

Adjust financial statementsAdjust financial statementsoror footnote disclosure footnote disclosure

RemoteRemote(slight chance)(slight chance)

RemoteRemote(slight chance)(slight chance)

No disclosureNo disclosurenecessarynecessary

No disclosureNo disclosurenecessarynecessary

Likelihood ofLikelihood ofoccurrence of eventoccurrence of event

Financial statementFinancial statementtreatmenttreatment


Auditor’s ConcernsAuditor’s Concerns

Pending litigation for patent infringement,Pending litigation for patent infringement,product liability, or other actionsproduct liability, or other actions

Income tax disputesIncome tax disputes Product warrantiesProduct warranties Notes receivable discountedNotes receivable discounted Guarantees of obligations of othersGuarantees of obligations of others Unused balances of outstanding letters of creditUnused balances of outstanding letters of credit

Pending litigation for patent infringement,Pending litigation for patent infringement,product liability, or other actionsproduct liability, or other actions

Income tax disputesIncome tax disputes Product warrantiesProduct warranties Notes receivable discountedNotes receivable discounted Guarantees of obligations of othersGuarantees of obligations of others Unused balances of outstanding letters of creditUnused balances of outstanding letters of credit


Audit Procedures forAudit Procedures forFinding ContingenciesFinding Contingencies

Inquire of management (orally andInquire of management (orally andin writing) about the possibilityin writing) about the possibility

of unrecorded contingencies.of unrecorded contingencies.

Inquire of management (orally andInquire of management (orally andin writing) about the possibilityin writing) about the possibility

of unrecorded contingencies.of unrecorded contingencies.

Review current and previous years’ internalReview current and previous years’ internalrevenue reports for income tax settlements.revenue reports for income tax settlements.

Review current and previous years’ internalReview current and previous years’ internalrevenue reports for income tax settlements.revenue reports for income tax settlements.

Review the minutes of directors’Review the minutes of directors’and stockholders’ meetingsand stockholders’ meetingsfor indications of lawsuits.for indications of lawsuits.

Review the minutes of directors’Review the minutes of directors’and stockholders’ meetingsand stockholders’ meetingsfor indications of lawsuits.for indications of lawsuits.


Audit Procedures forAudit Procedures forFinding ContingenciesFinding Contingencies

Analyze legal expenses and review invoicesAnalyze legal expenses and review invoicesand statements from legal counsel.and statements from legal counsel.

Analyze legal expenses and review invoicesAnalyze legal expenses and review invoicesand statements from legal counsel.and statements from legal counsel.

Obtain a letter from each major attorney ofObtain a letter from each major attorney ofthe client as to the status of pending litigation.the client as to the status of pending litigation.

Obtain a letter from each major attorney ofObtain a letter from each major attorney ofthe client as to the status of pending litigation.the client as to the status of pending litigation.

Review audit documentation for anyReview audit documentation for anyinformation that may indicateinformation that may indicate

a potential contingency.a potential contingency.

Review audit documentation for anyReview audit documentation for anyinformation that may indicateinformation that may indicate

a potential contingency.a potential contingency.

Examine letters of credit in force.Examine letters of credit in force.Examine letters of credit in force.Examine letters of credit in force.



Obtain and evaluate lettersObtain and evaluate letters

from the client’s attorneys.from the client’s attorneys.


Inquiry of Client’s AttorneysInquiry of Client’s Attorneys

A list including (1) pending threatenedA list including (1) pending threatenedlitigation and (2) asserted or unassertedlitigation and (2) asserted or unasserted

claims or assessments with whichclaims or assessments with whichthe attorney has had involvement.the attorney has had involvement.

A list including (1) pending threatenedA list including (1) pending threatenedlitigation and (2) asserted or unassertedlitigation and (2) asserted or unasserted

claims or assessments with whichclaims or assessments with whichthe attorney has had involvement.the attorney has had involvement.

A request that the attorney furnishA request that the attorney furnishinformation or comment aboutinformation or comment aboutthe progress of each item listed.the progress of each item listed.

A request that the attorney furnishA request that the attorney furnishinformation or comment aboutinformation or comment aboutthe progress of each item listed.the progress of each item listed.


Inquiry of Client’s AttorneysInquiry of Client’s Attorneys

A request for the identification ofA request for the identification ofany unlisted pending or threatenedany unlisted pending or threatened

legal action or a statementlegal action or a statementthat the client’s list is complete.that the client’s list is complete.

A request for the identification ofA request for the identification ofany unlisted pending or threatenedany unlisted pending or threatened

legal action or a statementlegal action or a statementthat the client’s list is complete.that the client’s list is complete.

A statement informing the attorney ofA statement informing the attorney ofthe attorney’s responsibility to informthe attorney’s responsibility to informmanagement of legal matters requiringmanagement of legal matters requiringdisclosure in the financial statementsdisclosure in the financial statementsand to respond directly to the auditor.and to respond directly to the auditor.

A statement informing the attorney ofA statement informing the attorney ofthe attorney’s responsibility to informthe attorney’s responsibility to informmanagement of legal matters requiringmanagement of legal matters requiringdisclosure in the financial statementsdisclosure in the financial statementsand to respond directly to the auditor.and to respond directly to the auditor.


Sarbanes-Oxley ActSarbanes-Oxley Act

Congress included provisions in this Act directingCongress included provisions in this Act directingthe SEC to use rules requiring attorneys servingthe SEC to use rules requiring attorneys servingpublic companies to report material violationspublic companies to report material violations

by the company of federal securities laws.by the company of federal securities laws.

Congress included provisions in this Act directingCongress included provisions in this Act directingthe SEC to use rules requiring attorneys servingthe SEC to use rules requiring attorneys servingpublic companies to report material violationspublic companies to report material violations

by the company of federal securities laws.by the company of federal securities laws.

The American Bar Association amendedThe American Bar Association amendedits attorney-client confidentiality rules toits attorney-client confidentiality rules topermit attorneys to breach confidentialitypermit attorneys to breach confidentialityif a client is committing a crime or fraud.if a client is committing a crime or fraud.

The American Bar Association amendedThe American Bar Association amendedits attorney-client confidentiality rules toits attorney-client confidentiality rules topermit attorneys to breach confidentialitypermit attorneys to breach confidentialityif a client is committing a crime or fraud.if a client is committing a crime or fraud.



Conduct a post-balance-sheetConduct a post-balance-sheet

review for subsequent events.review for subsequent events.


Period Covered byPeriod Covered bySubsequent Events ReviewSubsequent Events Review

Client’s endingClient’s endingbalance sheetbalance sheet

datedate

12-31-0412-31-04

Date clientDate clientissues financialissues financial

statementsstatements

3-26-053-26-05

AuditAuditreportreportdatedate

3-11-053-11-05

Period to whichPeriod to whichreview forreview forsubsequentsubsequent

events appliesevents applies

Period forPeriod forprocessingprocessing

the financialthe financialstatementsstatements


Types of Subsequent EventsTypes of Subsequent Events

1111Those that have a direct effectThose that have a direct effect

on the financial statementson the financial statementsand require adjustmentand require adjustment

Those that have a direct effectThose that have a direct effecton the financial statementson the financial statements

and require adjustmentand require adjustment

2222Those that have Those that have nono direct effect on the direct effect on the

financial statements but for whichfinancial statements but for whichdisclosure is advisabledisclosure is advisable

Those that have Those that have nono direct effect on the direct effect on thefinancial statements but for whichfinancial statements but for which

disclosure is advisabledisclosure is advisable


Requiring AdjustmentRequiring Adjustment

Declaration of bankruptcy by a customerDeclaration of bankruptcy by a customerwith an accounts receivable balancewith an accounts receivable balance

Settlement of a litigation at an amount differentSettlement of a litigation at an amount differentfrom the amount recorded on the booksfrom the amount recorded on the books

Disposal of equipment not being used inDisposal of equipment not being used inoperationsoperations at a price below the current book valueat a price below the current book value

Sale of investments at a price below recorded costSale of investments at a price below recorded cost

Declaration of bankruptcy by a customerDeclaration of bankruptcy by a customerwith an accounts receivable balancewith an accounts receivable balance

Settlement of a litigation at an amount differentSettlement of a litigation at an amount differentfrom the amount recorded on the booksfrom the amount recorded on the books

Disposal of equipment not being used inDisposal of equipment not being used inoperationsoperations at a price below the current book valueat a price below the current book value

Sale of investments at a price below recorded costSale of investments at a price below recorded cost


Advisability of DisclosureAdvisability of Disclosure

Decline in the market value of securities heldDecline in the market value of securities heldfor temporary investment or resalefor temporary investment or resale

Issuance of bonds or equity securitiesIssuance of bonds or equity securities Decline in the market value of inventory asDecline in the market value of inventory as

consequence of government action barringconsequence of government action barringfurther sale of a productfurther sale of a product

Uninsured loss of inventories as a result of fireUninsured loss of inventories as a result of fire A merger or an acquisitionA merger or an acquisition

Decline in the market value of securities heldDecline in the market value of securities heldfor temporary investment or resalefor temporary investment or resale

Issuance of bonds or equity securitiesIssuance of bonds or equity securities Decline in the market value of inventory asDecline in the market value of inventory as

consequence of government action barringconsequence of government action barringfurther sale of a productfurther sale of a product

Uninsured loss of inventories as a result of fireUninsured loss of inventories as a result of fire A merger or an acquisitionA merger or an acquisition


Inquire of managementInquire of management Correspond with attorneysCorrespond with attorneys Review internal statements preparedReview internal statements prepared

subsequent to the balance sheet datesubsequent to the balance sheet date Review records prepared subsequentReview records prepared subsequent

to the balance sheet dateto the balance sheet date Examine minutes issued subsequentExamine minutes issued subsequent

to the balance sheet dateto the balance sheet date Obtain a letter of representationObtain a letter of representation

Inquire of managementInquire of management Correspond with attorneysCorrespond with attorneys Review internal statements preparedReview internal statements prepared

subsequent to the balance sheet datesubsequent to the balance sheet date Review records prepared subsequentReview records prepared subsequent

to the balance sheet dateto the balance sheet date Examine minutes issued subsequentExamine minutes issued subsequent

to the balance sheet dateto the balance sheet date Obtain a letter of representationObtain a letter of representation

Audit TestsAudit Tests


Dual DatingDual Dating

The first date is the date for theThe first date is the date for thecompletion of field work exceptcompletion of field work except

for a specific exception.for a specific exception.

The first date is the date for theThe first date is the date for thecompletion of field work exceptcompletion of field work except

for a specific exception.for a specific exception.

The second date, which is alwaysThe second date, which is alwayslater, deals with the exception.later, deals with the exception.

The second date, which is alwaysThe second date, which is alwayslater, deals with the exception.later, deals with the exception.



Design and perform the final stepsDesign and perform the final steps

in the evidence-accumulationin the evidence-accumulation

segment of the audit.segment of the audit.


1. Perform final analytical procedures.1. Perform final analytical procedures.2. Evaluate the going-concern assumption.2. Evaluate the going-concern assumption.3. Obtain a management representation letter.3. Obtain a management representation letter.4. Consider information accompanying the4. Consider information accompanying the

basic financial statements.basic financial statements.5. Read other information in the annual report.5. Read other information in the annual report.

1. Perform final analytical procedures.1. Perform final analytical procedures.2. Evaluate the going-concern assumption.2. Evaluate the going-concern assumption.3. Obtain a management representation letter.3. Obtain a management representation letter.4. Consider information accompanying the4. Consider information accompanying the

basic financial statements.basic financial statements.5. Read other information in the annual report.5. Read other information in the annual report.

Final Evidence AccumulationFinal Evidence Accumulation


1. Financial statements1. Financial statements2. Completeness of information2. Completeness of information3. Recognition, measurement, and disclosure3. Recognition, measurement, and disclosure4. Subsequent events4. Subsequent events5. Matters related to reports on internal control5. Matters related to reports on internal control required by the Sarbanes-Oxley Actrequired by the Sarbanes-Oxley Act

1. Financial statements1. Financial statements2. Completeness of information2. Completeness of information3. Recognition, measurement, and disclosure3. Recognition, measurement, and disclosure4. Subsequent events4. Subsequent events5. Matters related to reports on internal control5. Matters related to reports on internal control required by the Sarbanes-Oxley Actrequired by the Sarbanes-Oxley Act

Letter of RepresentationLetter of Representation


1.1. Disclosure of all significant deficienciesDisclosure of all significant deficiencies2.2. Management’s acknowledgment of itsManagement’s acknowledgment of its

responsibility to prevent and detect fraudresponsibility to prevent and detect fraud3.3. Knowledge of fraud or suspect fraudKnowledge of fraud or suspect fraud4.4. Knowledge of any allegations of fraudKnowledge of any allegations of fraud

or suspected fraudor suspected fraud

1.1. Disclosure of all significant deficienciesDisclosure of all significant deficiencies2.2. Management’s acknowledgment of itsManagement’s acknowledgment of its

responsibility to prevent and detect fraudresponsibility to prevent and detect fraud3.3. Knowledge of fraud or suspect fraudKnowledge of fraud or suspect fraud4.4. Knowledge of any allegations of fraudKnowledge of any allegations of fraud

or suspected fraudor suspected fraud

Letter of Representation: Letter of Representation: Internal ControlInternal Control

Auditors of public companies mayAuditors of public companies mayobtain a combined representation letter.obtain a combined representation letter.

Auditors of public companies mayAuditors of public companies mayobtain a combined representation letter.obtain a combined representation letter.


Information Accompanying Information Accompanying Basic Financial StatementsBasic Financial Statements

Balance sheetBalance sheetIncome statementIncome statement

Statement ofStatement ofcash flowscash flows

FootnotesFootnotesDetailed comparativeDetailed comparative


Statistical dataStatistical dataSchedule ofSchedule of

insurance coverageinsurance coverage

BasicBasicfinancialfinancial


StandardStandardauditor’sauditor’s

reportreport

InformationInformationaccompanyingaccompanyingbasic financialbasic financial


Separate paragraph –Separate paragraph –unqualified, qualifiedunqualified, qualified

or disclaimeror disclaimer



Integrate the audit evidenceIntegrate the audit evidence

gathered, and evaluate thegathered, and evaluate the

overall audit results.overall audit results.


Evaluate ResultsEvaluate Results

Sufficiency of evidenceSufficiency of evidenceSufficiency of evidenceSufficiency of evidence

Evidence supports auditor’s opinionEvidence supports auditor’s opinionEvidence supports auditor’s opinionEvidence supports auditor’s opinion

Financial statement disclosuresFinancial statement disclosuresFinancial statement disclosuresFinancial statement disclosures


Evaluate ResultsEvaluate Results

Audit documentation reviewAudit documentation reviewAudit documentation reviewAudit documentation review

Independent reviewIndependent reviewIndependent reviewIndependent review

Summary of evidence evaluationSummary of evidence evaluationSummary of evidence evaluationSummary of evidence evaluation


YES NOYES NO1.1. Examination of prior year’sExamination of prior year’s

audit documentationaudit documentationa.a. Were last year’s audit files examinedWere last year’s audit files examined

for areas of emphasis in thefor areas of emphasis in thecurrent-year audit?current-year audit? ___ ______ ___

b.b. Was the permanent file reviewed forWas the permanent file reviewed foritems that affect the current year?items that affect the current year? ___ ______ ___

YES NOYES NO1.1. Examination of prior year’sExamination of prior year’s

audit documentationaudit documentationa.a. Were last year’s audit files examinedWere last year’s audit files examined

for areas of emphasis in thefor areas of emphasis in thecurrent-year audit?current-year audit? ___ ______ ___

b.b. Was the permanent file reviewed forWas the permanent file reviewed foritems that affect the current year?items that affect the current year? ___ ______ ___

Completing theCompleting theEngagement ChecklistEngagement Checklist


YES NOYES NO2.2. Internal controlInternal control

a.a. Has internal control been adequatelyHas internal control been adequatelyunderstood? understood? ___ ______ ___

b.b. Is the scope of the audit adequate inIs the scope of the audit adequate inlight of the assessed control risk? light of the assessed control risk? ___ ______ ___

c.c. Have all major weaknesses beenHave all major weaknesses beenincluded as reportable conditions inincluded as reportable conditions ina letter to the audit committee or toa letter to the audit committee or tosenior management?senior management? ___ ______ ___

YES NOYES NO2.2. Internal controlInternal control

a.a. Has internal control been adequatelyHas internal control been adequatelyunderstood? understood? ___ ______ ___

b.b. Is the scope of the audit adequate inIs the scope of the audit adequate inlight of the assessed control risk? light of the assessed control risk? ___ ______ ___

c.c. Have all major weaknesses beenHave all major weaknesses beenincluded as reportable conditions inincluded as reportable conditions ina letter to the audit committee or toa letter to the audit committee or tosenior management?senior management? ___ ______ ___



YES NOYES NO3.3. General documentsGeneral documents

a.a. Were all current-year minutes andWere all current-year minutes andresolutions reviewed, abstracted,resolutions reviewed, abstracted,and followed up? and followed up? ___ ______ ___

b.b. Has the permanent file been updated?Has the permanent file been updated? ___ ______ ___c.c. Have all major contracts andHave all major contracts and

agreements been reviewed andagreements been reviewed andabstracted and copied with allabstracted and copied with allexisting legal requirements?existing legal requirements? ___ ______ ___

YES NOYES NO3.3. General documentsGeneral documents

a.a. Were all current-year minutes andWere all current-year minutes andresolutions reviewed, abstracted,resolutions reviewed, abstracted,and followed up? and followed up? ___ ______ ___

b.b. Has the permanent file been updated?Has the permanent file been updated? ___ ______ ___c.c. Have all major contracts andHave all major contracts and

agreements been reviewed andagreements been reviewed andabstracted and copied with allabstracted and copied with allexisting legal requirements?existing legal requirements? ___ ______ ___



Evaluating Results andEvaluating Results andReaching ConclusionsReaching Conclusions

Actual audit evidenceActual audit evidence(by cycle, account,(by cycle, account,

and objective)and objective)

Audit proceduresAudit proceduresSample sizeSample size

Items to selectItems to selectTimingTiming

Actual audit evidenceActual audit evidence(by cycle, account,(by cycle, account,

and objective)and objective)

Audit proceduresAudit proceduresSample sizeSample size

Items to selectItems to selectTimingTiming

Evaluate resultsEvaluate results(by account and cycle)(by account and cycle)

Estimated misstatementEstimated misstatement(by account)(by account)

Achieved audit riskAchieved audit risk(by account and cycle)(by account and cycle)

Evaluate resultsEvaluate results(by account and cycle)(by account and cycle)

Estimated misstatementEstimated misstatement(by account)(by account)

Achieved audit riskAchieved audit risk(by account and cycle)(by account and cycle)


Evaluating Results andEvaluating Results andReaching ConclusionsReaching Conclusions

Evaluate overallEvaluate overallfinancial statementsfinancial statements

Estimated misstatementEstimated misstatement(overall statements)(overall statements)Achieved audit riskAchieved audit risk(overall statements)(overall statements)

Evaluate overallEvaluate overallfinancial statementsfinancial statements

Estimated misstatementEstimated misstatement(overall statements)(overall statements)Achieved audit riskAchieved audit risk(overall statements)(overall statements)

IssueIssueauditauditreportreport

IssueIssueauditauditreportreport


The audit report is the only thing that most usersThe audit report is the only thing that most userssee in the audit process and the consequences ofsee in the audit process and the consequences of

issuing an inappropriate report can be severe.issuing an inappropriate report can be severe.

The audit report is the only thing that most usersThe audit report is the only thing that most userssee in the audit process and the consequences ofsee in the audit process and the consequences of

issuing an inappropriate report can be severe.issuing an inappropriate report can be severe.

Issue the Audit ReportIssue the Audit Report



Communicate effectively with theCommunicate effectively with the

audit committee and management.audit committee and management.


Communicate fraud and illegal actsCommunicate fraud and illegal actsCommunicate internal control deficienciesCommunicate internal control deficienciesOther communication with audit committeeOther communication with audit committeeManagement lettersManagement letters

Communicate fraud and illegal actsCommunicate fraud and illegal actsCommunicate internal control deficienciesCommunicate internal control deficienciesOther communication with audit committeeOther communication with audit committeeManagement lettersManagement letters

Communicate with the Audit Communicate with the Audit Committee and ManagementCommittee and Management



Identify the auditor’sIdentify the auditor’s

responsibilities whenresponsibilities when

facts affecting the auditfacts affecting the audit

report are discoveredreport are discovered

after its issuance.after its issuance.


Period Covered byPeriod Covered bySubsequent Events ReviewSubsequent Events Review

Date clientDate clientissues financialissues financial


3-26-053-26-05

Client’s endingClient’s endingbalance sheetbalance sheet

datedate

12-31-0412-31-04

Period to whichPeriod to whichreview forreview forsubsequentsubsequent

events appliesevents applies

Period forPeriod forprocessingprocessing

the financialthe financialstatementsstatements

AuditAuditreportreportdatedate

3-11-053-11-05

Period in whichPeriod in whichsubsequentsubsequent

discovery ofdiscovery offacts is madefacts is made


End of Chapter 24End of Chapter 24

Completing the audit

Economy & Finance

Transcript of Completing the audit