Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter 11

Completing the Audit

“It ain’t over till it’s over.”

– Yogi Berra, former catcher for the New York Yankees

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Learning Objectives

1. Identify major activities performed by auditors in completing the substantive procedures following the date of the financial statements.

2. Understand the role of attorney letters in evaluating litigation, claims, and assessments.

3. Explain why auditors obtain written representations and identify the key components of written representations.

4. Identify the final steps in the completion of an audit.

5. Understand auditors’ responsibility for subsequent events and subsequently discovered facts.

6. Identify important activities and communications following the completion of the audit and audit report release date.

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Timeline for Major Activities in Audit

Date of the auditors’ report (audit completion date)

Beginning of year

Year-End Date (date of the financial statements)

Audit report release date

Interim testing (tests of controls and substantive procedures

• Completing substantive procedures

• Attorney’s letters • Written representations • Going-concern assessment • Adjusting journal entries • Audit documentation review • Subsequent events

Subsequently discovered facts

• Subsequently discovered facts

• Omitted audit procedures

• Management letter • Communications

with those charged with governance

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Procedures Prior to the Audit Report Release Date • Completing substantive procedures

• Attorney’s letters

• Written representations

• Going-concern assessment

• Adjusting entries

• Audit documentation review

• Subsequent events

• Subsequently discovered facts

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Completing Substantive Procedures Roll-forward procedures: Extend work from interim period to date of the financial statements

• Include both tests of controls and substantive procedures

• Performed following date of the financial statements

• Idea is to obtain evidence through the date of the financial statements

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Completing Substantive Procedures • Analytical procedures: Study of relationships

among financial and nonfinancial data

– Can be used in planning, substantive testing, and review (completion) stages

– In completion stages of audit, analytical procedures identify unusual or unexpected relationships not previously identified

• Review accounts for “miscellaneous”, “other,” and “clearing” accounts (may relate to earnings management)

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Completing Substantive Procedures Accounting estimates:

• Examples include future cash flows in evaluating asset impairments, allowance for doubtful accounts for receivables, and depreciation lives for fixed assets

• Review management’s process for developing estimates

• Review estimates for reasonableness

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Procedures Prior to the Audit Report Release Date • Completing substantive procedures

• Attorney’s letters

• Written representations

• Going-concern assessment

• Adjusting entries

• Audit documentation review

• Subsequent events

• Subsequently discovered facts

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Procedures for Litigation, Claims, and Assessments • Inquiry of clients

• Review minutes of meetings of stockholders, directors, and committees

• Review contracts, loan agreements, and correspondence from taxing and governmental agencies

• Obtain information concerning guarantees from bank confirmations

• Review documentation related to legal services

• Attorney’s letters

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Attorney’s Letters

Attorney Letter (with response)

Attorney Letter

Auditors Request Client to Send

Attorney Letter

2

3

1

CLIENT ATTORNEY

AUDITORS

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Attorney’s Letters: Responsibilities

• Auditors

– Initiate request for attorney letter

• Client

– Prepare listing, description, and evaluation of litigation, claims, and assessments for letter

– Send letter to attorney including information related to litigation, claims, and assessments

• Attorney

– Respond to auditors regarding client’s description of litigation, claims, and assessments contained in attorney letter

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Attorney’s Letters: Contents

• Listing of pending litigation, claims, and assessments

• Description of each item or case included in the listing

• Evaluation of the likelihood of an unfavorable outcome

• Estimate of the range of potential loss

• Understanding regarding unasserted claims

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Procedures Prior to the Audit Report Release Date • Completing substantive procedures

• Attorney’s letters

• Written representations

• Going-concern assessment

• Adjusting entries

• Audit documentation review

• Subsequent events

• Subsequently discovered facts

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Written Representations

• Provided by management to auditors

• Dated using date of auditors’ reports (audit completion date)

• Broad purpose

– Impress upon management its primary responsibility for the financial statements

– May establish auditors’ defense if a question related to inquiries subsequently arises

• Qualify or disclaim an opinion if not provided by the client

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Contents of Written Representations • Information related to financial statements

– Management’s responsibility for F/S and internal control over financial reporting

– Appropriate disclosure, presentation, and reasonableness of items

– Statement that uncorrected misstatements are immaterial

• Information provided to auditors by management

• Internal control over financial reporting (for public entities)

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Procedures Prior to the Audit Report Release Date • Completing substantive procedures

• Attorney’s letters

• Written representations

• Going-concern assessment

• Adjusting entries

• Audit documentation review

• Subsequent events

• Subsequently discovered facts

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Going-Concern Assessment

• Auditors required to consider whether evidence obtained during audit raises questions about ability to continue as a going concern

• If concerns exist, evaluate management’s plans to mitigate

– If concerns do not remain: No effect on report or financial statements

– If concerns remain: Disclose in F/S and modify auditors’ report

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Adjusting Entries

• Accumulate dollar effects of identified misstatements

• Evaluate materiality

– Rollover method considers the current period income effect(s) of misstatements

– Iron curtain method considers the aggregate effect of the adjustments on the entity’s balance sheet

– SAB 108 requires adjustments to be proposed if material under either approach

• Recommend adjustment of all misstatements identified

• Carry any uncorrected misstatements forward for consideration in future audits

• Communicate all adjustments and misstatements to audit committee or individuals charged with governance

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Audit Documentation Review

• Audit supervisor – Have all steps in audit plan been performed?

– Is referencing among documentation clear?

– Are explanations understandable?

• Audit manager and partner – Is the overall scope of the audit adequate?

– Do overall conclusions support the opinion?

• Reviewing partner – Is the quality of audit work and reporting consistent with quality

standards of the firm?

– Engagement quality review

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Procedures Prior to the Audit Report Release Date • Completing substantive procedures

• Attorney’s letters

• Written representations

• Going-concern assessment

• Adjusting entries

• Audit documentation review

• Subsequent events

• Subsequently discovered facts

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Timeline and Terms

Date of the auditors’ report (Audit completion date)

Beginning of year

Year-End Date (Date of the Financial Statements)

Audit report release date

Subsequent Events

Subsequently Discovered Facts

• Subsequent events occur between the date of the financial statements and date of the auditors’ report

• Subsequently discovered facts become known after the date of the auditors’ report

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Procedures to Identify Subsequent Events • Obtain understanding of procedures management

performs to identify subsequent events

• Inquire of management and those charged with governance

• Read minutes of meetings of owners, management, and those charged with governance

• Review entity’s interim financial statements

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Types of Subsequent Events

• Provide new information about conditions existing at date of the financial statements

– Adjust financial statements to reflect new information

• Involve events that arose following the date of the financial statements

– Disclose in financial statements

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Subsequently Discovered Facts • If discovered prior to audit report release date, perform

procedures related to items

– Revise date of auditors’ reports to reflect new completion date

– Dual date auditors’ reports

• Following audit report release date: If facts would result in revision of auditors’ report or F/S and individuals are relying on F/S

– Notify individuals relying on F/S

– Issue revised F/S which provide disclosure of facts

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Procedures Following Audit Report Release Date

• Subsequently discovered facts

• Omitted procedures

• Communication with those charged with

governance

• Management letters

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Omitted Procedures

• Perform procedures if:

– Omitted procedures are important

– Individuals are currently relying on financial statements and auditors’ reports

• If previous opinion can be supported, no further action necessary

• If previous opinion cannot be supported

– Withdraw the original report

– Issue revised reports

– Inform persons currently relying on the financial statements

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Communication with Individuals Charged with Governance

• Auditors’ responsibility under GAAS

• Overview of planned scope and timing of audit

• Judgment about quality of accounting policies, estimates, and disclosures

• Significant difficulties encountered during audit

• Uncorrected misstatements

• Disagreements with management

• Material, uncorrected misstatements

• Representations requested from management

• Management consultations with other auditors

• Significant issues discussed with management

• Other findings or issues significant and relevant to those charged with governance

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Management Letters

• Not required under GAAS

• Are prepared as a by-product of procedures performed in audit

• Provide recommendations to client for improving effectiveness and efficiency of operations

• Delivered by auditors to client following audit engagement

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Summary of Audit Communications Type From To Timing Method

Engagement letter Auditors Client Before engagement

Written

Acceptance letter Client Auditors Before engagement

Written

Attorney letter response

Attorney Auditors Near date of auditors’ report

Written

Written representations

Client Auditors Date of auditors’ report

Written

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Summary of Audit Communications (Continued) Type From To Timing Method

Internal control deficiencies

Auditors Individuals charged with governance

For public entities, prior to audit report release date

Written

Communication with those charged with governance

Auditors Individuals charged with governance

After audit Oral or written

Management letter

Auditors Client After audit Oral or written

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