9.401 Auditing

1. 9.401 Auditing Chapter 21 Completing the Audit

2. Audit Completion Activities • Reviewing for contingent liabilities • Reviewing for subsequent events • Accumulating final evidence • Evaluating results • Working Paper Review • Writing the audit Report (see chapt 2) • Read annual report • Audit Correspondence

3. Review for contingent liabilities • Goal: • Identify all contingent liabilities • Determine likelihoods and amts involved • Ensure treatment & disclosure is appropriate

4. Techniques for contingent liabilities and commitments • Consider evidence already gathered • Confirmations, warranties etc. • Enquiry of management • Review income tax assessments • Review minutes of meetings • Analyze legal expenses-review invoices • Confirm client lawyers (next slide) • Read contracts etc.

5. Lawyer’s letters • Sent to all lawyers used by client • Sent on client letterhead, signed by client, with instructions to return confirmation to auditor • Contains: • List, description & evaluation of all known claims • Request to advise if info is reasonable • Request to advise if list is incomplete • Lawyers are encouraged to respond but may not or may use slightly different terminology

6. Review for subsequent Events • Auditors are responsible for reviewing events up to date of audit report (=“substantial completion of fieldwork” • Goals: • Identify information having direct effect on f/s and requiring adjustment (=indicates condition existing at year end) • Identify important events requiring disclosure

7. Techniques for subsequent events • Subsequent receipts • Subsequent payments • Settlement prices of subsequent transactions • Enquiry of management • Review minutes of meetings • Confirm client lawyers • Review internal statements for subsequent pd. • Review books of account for significant or unusual transactions • Letter of representation

8. Date of audit report • Date = substantial completion of fieldwork, including subsequent event review • If a subsequent event arises after that date and before issue of report, auditor can: • Extend fieldwork (subsequent event review for all events) to new date or • Limit review to new event only and double-date report

9. Subsequent discovery of facts • Auditor not actively engaged to look for info after release of audit report, but some may come to their attention. • If relates to condition that existed before audit report issue and material: • Auditor must audit subsequent event • Request client re-issue and auditor re-issues report • If client refuses, consult legal advice

10. Accumulating Final Evidence • Final Analytical Procedures • Evaluate Going Concern Assumption

11. Client Representation Letter • Goal: • Impress upon mgmt that f/s are their reponsibility • Document responses of mgmt

12. Client Representations • On the client’s letterhead, addressed to the auditor, signed by responsible officers and dated as of the auditor’s reports. Contains, among other things: • Acknowledgement of primary responsibility for fair presentation of financial statements in conformity with GAAP • Availability of all financial records and related data • Completeness of the minutes of meeting of stockholders, directors, and important committees • Info about related parties • Irregularities involving management or employees • Plans or intentions affecting b/s items • see HB 7100 These representations are not substitutes for corroborating evidence obtainable by the auditor.

13. Evaluating Results • Cumulative known errors, most likely and possible errors, including those on opening balances on: • Total assets • Total liabilities • Current assets/liabilities • Net income • Qualitative aspects • Overall fair presentation of f/s, including disclosure

14. Working Paper Review • Goals: • Evaluate staff • Ensure audit meets firm standards and GAAS • Counteract biases • Primacy, recency • Internal control descriptions prepared by client (L. Kopp)

15. Working Paper Review: to consider • Planning decisions were adequate • All work complete and properly documented • Conclusions appropriate • Analytical review results

16. Other Information and Supplementary Information • Other Information Section 7500.13 - • Auditor’s have and obligation to read (study) the information and determine whether it is inconsistent with the audited financial statements. • However the auditor is not required to review press releases, analyst’s interviews or other forms of irregular financial new releases specifically engaged by the client to do so. • 13 The auditor should read the other information in the annual report and consider whether any of this information is inconsistent with the financial statements on which he has reported. [JAN. 1986]

17. Other Information and Supplementary Information • Other Information Section 7500.13 - • Auditor’s have and obligation to read (study) the information and determine whether it is inconsistent with the audited financial statements. • However the auditor is not required to review press releases, analyst’s interviews or other forms of irregular financial new releases specifically engaged by the client to do so. • 13 The auditor should read the other information in the annual report and consider whether any of this information is inconsistent with the financial statements on which he has reported. [JAN. 1986]

18. Read annual report • Auditors have and obligation to read (study) the information and determine whether it is inconsistent with the audited financial statements. Any inconsistencies must be corrected. • NOT required to review press releases, analyst’s interviews or other forms of irregular financial new releases specifically engaged by the client to do so.

19. Audit Communications • Necessary communication with mgmt (and audit committee): • Misstatements (other than trivial ones) • Illegal or possibly illegal acts • Internal control “reportable conditions” (=significant deficiencies in design or operation)

20. Communications with audit committee • Auditor vs mgmt responsibility • Significant planning decisions • Significant acctg policies • Areas of audit sensitivity, mgmt estimates • Disagreements with mgmt, major issues discussed • Difficulties encountered

21. Management letters • Optional • Areas of improvement in internal control, efficiency and effectiveness in operations