Chapter 11

1. Chapter 11 Completing the Audit “It ain’t over till it’s over.” – Yogi Berra, former catcher for the New York Yankees

2. Roll-forward work Revenue and expense accounts Attorneys’ letters Management representations Adjusting entries Audit documentation review Subsequent events Subsequent discovery of facts Omitted audit procedures Management letter Audit committee communications Considerations in Completing the Audit

3. Major Activities in Audit Beginning End of Last day of Issuance of year year fieldwork of report Interim testingRoll-forward work Subsequent events (tests of controls Revenue and expenses (dual-dating) and substantive Attorneys’ letters procedures) Management representations Adjusting entries Audit documentation review Subsequent events

4. Major Activities in Audit (Continued) Beginning End of Last day of Issuance Of year year fieldwork of report Subsequent discovery of facts Omitted audit procedures Management letter Audit committee communications

5. Activities Between End of Year and Last Day of Fieldwork • Revenue and expense accounts • Attorneys’ letters • Management representations • Audit documentation review • Subsequent events

6. Revenue and Expense Accounts • Substantive procedures for related balance sheet accounts • Analytical procedures • Scan accounts for large and unusual entries • Be aware of “miscellaneous,” “other,” and “clearing” accounts – “earnings management”

7. Activities Between End of Year and Last Day of Fieldwork • Revenue and expense accounts • Attorneys’ letters • Management representations • Audit documentation review • Subsequent events

8. 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

9. Attorneys’ 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

10. Attorneys’ Letters: Responsibilities • Auditor • Initiate request for attorney letter • Client • Prepare listing of litigation, claims, and assessments for letter • Request attorney letter • Attorney • Comment on listing of litigation, claims, and assessments in letter • Return letter to auditor

11. Activities Between End of Year and Last Day of Fieldwork • Revenue and expense accounts • Attorneys’ letters • Management representations • Audit documentation review • Subsequent events

12. Management Representations • Provided by management to the auditor • Dated the last day of fieldwork • Broad purpose • Impress upon management its primary responsibility for the financial statements • May establish an auditor’s defense if a question related to inquiries subsequently arises • Qualify or disclaim an opinion if not provided by the client

13. Management Representations • Required without regard to materiality: • Management responsibility for the fairness of the financial statements • Availability of all financial records and data • Management responsibility for design and implementation of programs and controls related to fraud • Disclosure of significant deficiencies in internal control • Information concerning fraud involving the client

14. Activities Between End of Year and Last Day of Fieldwork • Revenue and expense accounts • Attorneys’ letters • Management representations • Audit documentation review • Subsequent events

15. Audit Documentation Review • Audit supervisor • Have all steps in audit program 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 • Are the quality of audit work and reporting consistent with quality standards of the firm?

16. Activities Between End of Year and Last Day of Fieldwork • Revenue and expense accounts • Attorneys’ letters • Management representations • Audit documentation review • Subsequent events

17. Subsequent Period Beginning End of Last day of Issuance of year year fieldwork of report Subsequent Period • Auditor performs procedures to evaluate events that may affect presentation and disclosure in the financial statements • Events occurring during this period are known as subsequent events

18. Procedures in Subsequent Period • Review latest interim financial statements • Inquire of officers and other executives • Read minutes of meetings of shareholders, directors, and committees • Obtain attorneys’ letter • Obtain management representations

19. Subsequent Events • Type I • Provide new information about conditions existing at balance sheet date • Adjust financial statements to reflect new information • Type II • Involve events occurring after balance sheet date • Disclose in financial statements • Prepare pro forma financial statements

20. When are Subsequent Events Identified? • Prior to last day of fieldwork • Perform audit procedures and ensure proper disclosure • Following last day of fieldwork but prior to issuance of report • Dual date audit report • Following issuance of audit report • “Subsequent discovery of facts”

21. Activities Following Issuance of Auditor’s Report • Subsequent discovery of facts • Omitted procedures • Communication with audit committee • Management letters

22. Subsequent Discovery of Facts • Require disclosure of events if: • Facts are reliable and existed at report date • Facts affect financial statements and auditor’s report • Persons are continuing to rely on financial statements and auditor’s report • If client refuses disclosure, auditor should inform board that he or she will notify regulatory agencies and others relying on the report

23. Omitted Procedures • Perform procedures if: • Omitted procedures are important • Individuals are currently relying on financial statements and auditor’s report • If previous opinion can be supported, no further action necessary • If previous opinion cannot be supported • Withdraw the original report • Issue a new report • Inform persons currently relying on the financial statements

24. Auditor’s responsibility Initial selection and changes in accounting policies Management judgments and estimates Audit adjustments Uncorrected misstatements Auditor judgment about quality of accounting principles Alternative accounting treatments permissible under GAAP Disagreements with management Issues related to initial or recurring retention of the auditor Communication with Audit Committee

25. 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 auditor to client following audit engagement

26. Summary of Audit Communications