AUDITING CHAPTER 17 Completing the Audit By David N. Ricchiute.
Winter 2015auditing chapter 24 Completing the Audit 1.
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Transcript of Winter 2015auditing chapter 24 Completing the Audit 1.
Winter 2015auditing
chapter 24
Completing the Audit
1
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Elaine
describe what is meant by Interim Testing.
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Contingent Liabilities / Attorney’s Letter
Subsequent Events
Management Representations
analytical procedures
Final assessment of audit risk - opinion
communications to audit comm or mgmt• AU-c 260 Communication with Those Charged
with Governance• AU-c 265 Communicating Internal Control
Related Matters Identified in an Audit
subsequent discovery of facts
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examining subsequent payments to suppliers and other creditors to ensure that they were correctly recorded.
almost $5 million of purchases applicable to Dec. 31 audit period that had not been included as liabilities.
unrecorded liabilities
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Contingent Liabilities / Losses
• A potential future payment to an outside party from an existing condition
• Uncertainty about the amount
• Outcome will be resolved by future events
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Contingent Liabilities / Losses
• Lawsuits are an example of a contingency
• Income tax disputes• Product warranties• Guarantees of the debts of others
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Steve
what does SFAS No. 5 (ASC 450) teach us about
contingent losses or
contingent liabilities
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SFAS 5 (ASC 450) contingencies
probable estimable record loss
probable not estimable disclose
reasonably possible estimable or “
reasonably possible not estimable “
remote ignore ignore
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SFAS 5 (ASC 450) contingencies
estimablecan’t be
estimated
Probable accrue loss fn disclose
Possible fn disclose fn disclose
Remote do nothing do nothing
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Contingencies – lawsuits audit procedures
• Inquire of management
• Review minutes of BoD meetings
• Analyze legal expense
• Obtain a letter from each major attorney
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Dan
Management is our primary source of information about
Litigation, Claims and Assessments
what is our most important source of evidence to corroborate managements’ representations regarding LCA ?
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Inquiry of Client’s Attorney
A list including (provided by client’s Senior Management)
– Pending litigation– Asserted or unasserted claims
Information about each item on list – Likelihood of an unfavorable outcome– Amount or range of potential loss
A statement that the list is completePage 348
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“Inquiry of a Client’s Attorney”
this is an auditing procedure
Who sends this letter to the attorney ?To whom does their attorney respond ?
Catherine
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“Inquiry of a Client’s Attorney”
what kind of problem do we have if their attorney refuses to respond ?
what kind of report will we issue ?
Karli
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Do we modify the first paragraph?
Do we modify the Management’s Responsibility paragraph?
Do we modify the Auditor’s Responsibility paragraph?
Do we modify the Opinion paragraph?
Is there a Basis for Opinion paragraph? Before or after?
Dev
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Elizabeth T
describe the two types of subsequent events
how do we decide whether to make an adjusting entry to include the effects of the subsequent event in the financial statement balances
or
just disclose the event in the footnotes
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subsequent events
Type I - adjusting journal entrya.Those that provide evidence of conditions that existed at the date of the financial statements
Type II - discloseb. Those that provide evidence of conditions that arose after the date of the financial statements
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Type I - adjusting journal entry
• Declaration of bankruptcy by a customer with a large account receivable
• Settlement of litigation for an amount greater than recorded
• Sale of investments for less than recorded amount
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Type II - disclosure
• Issue bonds or equity securities• Merger or acquisition• Loss due to fire or natural disaster
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subsequent events – auditing procedures
inquire of management
read internal financial statements
read minutes of Bd of Directors’ meetings
obtain a letter of representationpage 353
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AU-C Section 580*
Written RepresentationsSource: SAS No. 122.
Effective for audits of financial statements for periods ending on or after December 15, 2012.
Introduction
Scope of This Section
.01 This section addresses the auditor's responsibility to obtain written representations from management and, when appropriate, those charged with governance in an audit of financial statements.
.02 Exhibit D, "List ofAU-C Sections Containing Requirements for Written Representations," lists other AU-C sections containing subject matter-specific requirements for written representations. The specific requirements for written representations of other AU-C sections do not limit the application of this
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Letter of representation
Management is responsible for the financial statements
Management believes the f/s conform to GAAP
All financial records have been made available
All minutes have been made available
Information concerning fraud or illegal acts
Information concerning related party transactions
Unasserted claims that are probable have been disclosed
Subsequent events
Page 355
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Brenda
Who prepares and signs the letter of client representations?
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Jeremy
we must obtain certain representations from management in writing
what kind of problem do we have if the client refuses?
what kind of report will we issue ?
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Do we modify the first paragraph?
Do we modify the Management’s Responsibility paragraph?
Do we modify the Auditor’s Responsibility paragraph?
Do we modify the Opinion paragraph?
Is there a Basis for Opinion paragraph? Before or after?
Elizabeth W
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Ellen
what is a “waived” or “passed” adjustment?
on page 360
“unadjusted misstatement audit schedule”
“summary of possible misstatements”
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Materiality page 122
34
minimum maximumpercent dollar percent dollar
earnings from operations 7,370 0.03 221 0.06 442current assets 51,027 0.03 1,531 0.06 3,062total assets 61,367 0.01 614 0.03 1,841current liabilities 13,216 0.03 396 0.06 793
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Ellen
at what three stages of the audit MAY we perform Analytical Procedures ?
at what stages of the audit are we required to perform Analytical Procedures?
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req’d planning phase
substantive tests
req’d at conclusion as an overall review
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AU-C Section 520*
Analytical ProceduresSource: SAS No. 122.
Effective for audits of financial statements for periods ending on or after December 15, 2012.
Introduction
Scope of This Section
.01 This section addresses the auditor's use of analytical procedures as substantive procedures (substantive analytical procedures). It also addresses the auditor's responsibility to perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion on the financial statements. Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, addresses the use of analytical procedures as risk assessment procedures (which may be referred to as analytical procedures used to plan the audit).1 Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, addresses the nature, timing, and extent of audit procedures in response to assessed risks; these audit procedures may include substantive analytical procedures
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Contingent Liabilities / Attorney’s Letter
Subsequent Events
Management Representations
analytical procedures
Final assessment of audit risk - opinion
communications to audit comm or mgmt• AU-c 260 Communication with Those Charged
with Governance• AU-c 265 Communicating Internal Control
Related Matters Identified in an Audit
subsequent discovery of facts
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Ryan M
what is the definition of audit risk?
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.05
known
misstatement
from samples
projected
uncorrected
misstatements
0
material
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final review of workpapers
• all accounting and auditing questions have been resolved
• support the auditor’s opinion• provide evidence the audit complied with GAAS• means of coordinating and supervising the audit
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Eric
who is an “independent reviewer?”
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dual dating
events that occur between the end of field work (the report date) and the date the report is issued
extend field work or
dual date
page 353
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dual dating p. 353
Hewlett-Packard has an October 31 year end
Ernst & Young completed field work on November 13th
On Dec. 6, 2001, Hewlett-Packard made a $1 billion dollar debt offering, which it disclosed in Note 19 in its financial statements.
This is how Ernst & Young dated its auditor’s report
November 13, 2001, except for Note 19, as to which the date is December 6, 2001.
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Deficiency in internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A deficiency in design exists when •a control necessary to meet the control objective is missing, or
• an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively.
Material weakness. A deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.
Significant deficiency. A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged
with governance.
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Nico
what is the definition of control risk?
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control risk
the risk that a misstatement in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
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Lauren
what is a material weakness?
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material weakness (page 177 )
a significant deficiency that results in a reasonable possibility that a material misstatement would not be prevented, or detected and corrected on a timely basis
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Ryan H
what two types of control deficiencies do we report ?
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Steffan
to whom do we report deficiencies in the internal controls ?
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communication of internal control matters
• communicate what– significant deficiency– material weaknesses
• communicate to who– the audit committee– board of directors– owners or senior managementthose
charg
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governance
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communication with audit committees
• The auditor’s responsibilities• An overview of the scope of the audit
– Approach to address significant risks• Corrected misstatements• Accounting practices & estimates• Difficulties & disagreements with management
page 362
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management letter
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Contingent Liabilities / Attorney’s Letter
Subsequent Events
Management Representations
analytical procedures
Final assessment of audit risk - opinion
communications to audit comm or mgmt• AU-c 260 Communication with Those Charged
with Governance• AU-c 265Communicating Internal Control
Related Matters Identified in an Audit
subsequent discovery of facts
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Fischer vs. Kletz, 266 F. Supp. 180 (SDNY 1967),
the auditor did not disclose errors in a previously issued audit report when (s)he discovered the errors three months later during a consulting engagement
an auditor has a duty to anyone still relying on his report to disclose subsequently discovered errors in the report
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subsequent discovery of facts existing at the date of the audit report
the auditor shoulda. discuss the matter with management and, when appropriate, those charged with governance.
b. determine whether the financial statements need revision and, if so, inquire how management intends to address the matter in the financial statements.
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subsequent discovery of facts existing at the date of the audit report
.16 If management revises the financial statements, the auditor should
a. apply the requirements of paragraph .
b. if the audited financial statements have been made available to third parties, assess whether the steps taken …. ensure that anyone in receipt of those financial statements is informed of the situation,
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subsequent discovery of facts existing at the date of the audit report
.17 If management does not revise the financial statements in circumstances when the auditor believes they need to be revised, thena. if the audited financial statements have not been made available to third parties, the auditor should notify management and those charged with governance—unless all of those charged with governance are involved in managing the entity4—not to make the audited financial statements available to third parties before the necessary revisions have been made and a new auditor's report on the revised financial statements has been provided. If the audited financial statements are, nevertheless, subsequently made available to third parties without the necessary revisions, the auditor should apply the requirements of paragraph .17b.
b. if the audited financial statements have been made available to third parties, the auditor should assess whether the steps taken by management are timely and appropriate to ensure that anyone in receipt of the audited financial statements is informed of the situation, including that the audited financial statements are not to be relied upon..18 If management does not take the necessary steps to ensure that anyone in receipt of the audited financial statements is
informed of the situation, as provided by paragraphs .16b or .17b, the auditor should notify management and those charged with governance—unless all of those charged with governance are involved in managing the entity5—that the auditor will seek to prevent future reliance on the auditor's report. If, despite such notification, management or those charged with governance do not take the necessary steps, the auditor should take appropriate action to seek to prevent reliance on the auditor's report. (Ref: par. .A23–.A26)
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subsequent discovery of facts existing at the date of the audit report
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end of audit party
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great quarterYou made it very enjoyable for me to come to
work every day
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congratulationsto our March 2015 grads
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