Completing The Audit

1. Completing The Audit Good Review Requires More Than Looking At Working Papers

2. CONTINGENCIES SUBSEQUENT EVENTS FINAL ANALYTICAL REVIEW EVALUATE GOING CONCERN CLIENT REP. LETTER EVALUATE RESULTS OTHER INFORMATION IN ANNUAL REPORTS COMMUNICATION WITH AUDIT COMMITTEE MANAGEMENT LETTER PHASE IV : WRAP-UP ACTIVITIES

3. Irregularities and illegal acts Significant control weaknesses Other matters: Financial statement adjustments Disagreements with management Difficulties encountered in the audit REQUIRED COMMUNICATION WITH AUDIT COMMITTEE

4. TYPES OF WORKING PAPER REVIEW Types of Who When Review Does Done Purpose In-charge review Audit partner review Independent review Peer review

5. Final Evidence  Perform Final Analytical Procedures  Evaluate Going Concern Assumption Obtain Management Representation Letter  Read Other Information in the Annual Report Accumulation

6. Completing the Engagement Checklist 1.Examination of prior year’s working papers a. Were last year’s working paper and review notes examined for areas of emphasis in the current-year audit? b. Was the permanent file reviewed for items that affect the current year? 2. Internal control a. Has internal control been adequately understood? b. Is the scope of the audit adequate in light of the assessed control risk? c. Have all major weaknesses been included as reportable conditions in a letter to the audit committee or to senior management? 3. General documents a. Were all current-year minutes and resolutions reviewed, abstracted, and followed up? b. Has the permanent file been updated? c. Have all major contracts and agreements been reviewed and abstracted and copied with all existing legal requirements?

7. Evaluating Results and Reaching Conclusions on the Basis of Evidence in the CYCLE, ACCOUNT, AND THE OVERALL FS PRESENTATION

8. A Contingent Liabilities A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. What if it’s probable & reasonably est?

9. Certain contingent liabilities are of considerable concern to the auditor: • Pending litigation for patent infringement, • product liability, or other actions • Income tax disputes • Product warranties • Notes receivable discounted • Guarantees of obligations of others • Unused balances of outstanding letters of credit

10. Audit Procedures for Finding Contingencies • Inquire of management (orally and in writing) about the possibility of unrecorded contingencies. • Review current and previous years’ internal revenue agent reports for income tax settlements. • Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits or other contingencies. continued

11. Audit Procedures for Finding Contingencies • Analyze legal expense for the period under audit and review invoices and statements from legal counsel. • Obtain a letter for each major attorney performing legal services. • Review working papers for any information that may indicate a potential contingency. • Examine letters of credit in force as of the balance sheet date and obtain a confirmation of the used and unused balance.

12. Typical Inquire of Attorney

13. DISTINCTION BETWEEN REVIEW FOR SUBSEQUENT EVENTS AND SUBSEQUENT DISCOVERY OF FACTS AFTER THE BALANCE SHEET DATE

14. Period covered by Subsequent Events Review

15. Review for Subsequent Events and Subsequent Discovery of Facts

16. Type I Subsequent Events Those that have a Direct Effect on the Financial statements and Require Adjustment • Declaration of bankruptcy by a customer because of a • deteriorating financial condition (deteriorating w/in the BS date). • Settlement of a litigation that existed at the BS date. • Litigation claim based on events covered by the BS date.

17. If it is material and the client won’t adjust the FS’s: EXPLANATORY Paragraph W/hold report W/draw from Engagement (EWW!) Type I Subsequent Events

18. Type II Subsequent Events continued Those that have NO Direct Effect on the Financial Statements but Which Disclosure is Advisable (Interpretation/usefulness of FS’s affected) • Decline in the market value of securities • Issuance of bonds or equity securities • Uninsured loss of PPE or inventories as a result of fire, etc. • A merger or an acquisition/ purchase of a business • Losses of AR d/t issues arising subsequent to the BS date • Settlement of litigation, where the issue causing litigation took place • s/t the BS date

19. Audit Tests • Inquire of Management • Correspond with Attorneys • Review Internal statements Prepared Subsequent to the • Balance Sheet Date • Review Records Prepared Subsequent to the Balance Sheet Date • Examine Minutes Issued Subsequent to the Balance Sheet Date • Obtain a Letter of Representation • basically READ and REVIEW - SOUNDS LIKE COR(II)A

20. Dual Dating Dual-dated audit report means that the audit report includes two dates. 1. The first date is the date for the completion of field work except for a specific exception. 2. The second date, which is always later, deals with the exception.

21. Review for Subsequent Events and Subsequent Discovery of Facts

22. Once the report is issued, the auditor has no further obligation to perform additional procedures UNLESS…new material information comes to our attention (don’t have to go looking) Are people attaching importance to the info, likely to rely on the info? Subsequent Discovery of Facts

23. If it is a material issue, then the auditor must PREVENT further reliance in the report 3 D’s: The auditor can advise the client to disclose the new info: 1. Draft new FS’s/revoke old, 2. Disclose in imminent report (e.g., Qrtly), OR 3. Press Release “DON’T RELY!) Subsequent Discovery of Facts

24. If the client won’t disclose the new info, then Notify the CLIENT and BOD’s – report can no longer be associated w/ the FS’s Notify REGULATORY AGENCIES – “audit report unreliable!” Notify each PERSON known to be relying - “audit report unreliable!” Subsequent Discovery of Facts

25. A necessary audit procedure wasn’t performed (perhaps discovered in internal or external peer review) Ask the Q: is the report still reliable? IF NO, or uncertain, DO the procedure Ask again: is the report still reliable? If NO, do the 3 “D’s” Omitted Procedures detected after report date