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Accounting 4P62. External Auditing II. Section 1. Completing The Audit CICA 3290, 3840, 5405, 6550, 6560. Completion of Field Work. Evaluation of Findings. Completing the Audit. Divided into two categories. Contingent liabilities Subsequent event review Inquiries of client lawyers
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Accounting 4P62 External Auditing II
Section 1 Completing The Audit CICA 3290, 3840, 5405, 6550, 6560
Completion of Field Work Evaluation of Findings Completing the Audit • Divided into two categories Contingent liabilities Subsequent event review Inquiries of client lawyers Related party transactions Client representation letter Overall analytical review General review of statement of cash flow Final assessment of materiality and risk Formulate opinion on F/S Complete review of working papers Technical review of F/S Internal control weakness communication to client Management letter
Contingent Liabilities • CICA 3290 • Three conditions needed: 1. 2. 3. • Three levels of possibility 1. likely 2. unlikely 3. not determinable
Notes to the Financial Statements • 1. • 2. • 3. • What do contingent liabilities typically include? • The problem for the auditor?
End of Field Work (Report Date) Report Issuance Date B/S Date Dec. 31 Mar. 1 Mar. 31 Subsequent Events Subsequent Events Period Subsequent Event Review • CICA 6550 • Time dimension of subsequent events
Types of Subsequent Events • Type 1 • main feature? • Type 2
Audit Tests for Subsequent Events • Interim F/S • Enquiry of management • Minutes • Legal counsel • Letter of representation
Inquiries of Client Lawyers • Claims and possible claims may have a material effect on F/S • auditor’s responsibility? • Obtain form management 1. 2. • Letter of audit enquiry to client’s outside legal counsel
ABC Company 123 Main Street Toronto, Ontario Dewey, Cheatem, and Howe Barristers and Solicitors 456 King Street Hamilton, Ontario Dear Sir(s): In connection with the preparation and audit of our financial statements for the fiscal period ended December 31, 200X, we have made the following evaluations of claims and possible claims with respect to which your firm’s advice or representation has been sought: Description Evaluation Name of entity, name of other party, nature, amount claimed and current status. Likelihood of loss (or gain) and estimated amount of ultimate loss (or gain), if any; or indicate that likelihood is not determinable or amount cannot be reasonably estimated.
Would you please advise us, as of March 31, 200Y, on the following points: (a) Are the claims and possible claims properly described? (b) Do you consider that our evaluations are reasonable? (c) Are you aware of any claims not listed above which are outstanding? If so, please include in your response letter the names of the parties and the amount claimed. This inquiry is made in accordance with the Joint Policy Statement of January 1978 approved by the Canadian Bar Association and the Auditing Standards Committee of the Canadian Institute of Chartered Accountants. Please address your reply, marked “Privileged and Confidential”, to this company and send a signed copy directly to our auditor, Ace and Co., Chartered Accountants, 789 West Avenue, Toronto, Ontario. Yours truly Susan Bleach, President cc. Ace and Co. Susan Bleach
Related Party Transactions • CICA 3840 • What type of transactions? 1. 2. 3. 4.
Auditor must: • Be aware • Apply procedures • Proper accounting and F/S disclosures • Additional procedures: • review minutes • conflict of interest statement • filings
Client Representation Letter • Objective: • confirm oral representations • document continuing appropriateness of these representations • reduce misunderstanding • F/S responsibility of management • Dated • date of the auditor’s report
Content of the letter • Acknowledgement of management's responsibility • Completeness and availability of data • Absence of unrecorded T/As , error, and fraud • Compliance with law • Existence of related party T/As and contingencies • Information concerning subsequent events • Management’s plans or intentions
Overall Analytical Review • Applied to final draft of F/S • compare F/S subtotals and total with prior year • calculate relevant ratios • non-financial data comparison • common size statements
Audit Program WP Ref. Done by Date General Review of Statement of Cash Flow • Auditor must express an opinion on this F/S • Verify the accuracy of the statement by recalculation. • Ascertain that the statement format is the most informative in the circumstances. • Ascertain that the statement discloses all important aspects of the company’s operating, financing, and investing activities. • Determine that the statement discloses the important sources and uses of cash.
Audit Program WP Ref. Done by Date Ascertain that the format correctly and prominently shows cash provided from or used by operations and cash provided from or used by extraordinary items. Verify that the statement is based on the balances shown in the audited financial statements at the beginning and end of the period covered by the audit. Establish that the statement of cash flow is presented for each period for which the income statement is presented. Trace, match, or agree statement amounts to like amounts in other financial statements and/or in the working papers.
Final Assessment of Materiality and Audit Risk • Two steps • aggregate errors found during examination • determine affect on B/S and I/S
Determining aggregate errors • Components • uncorrected errors • projected errors from audit sampling • estimated errors form other procedures • What is the total of these called?
S 1 ABC Corp. Over/Under December 31, 200X Prepared by: D.F. Date:2/12/0Y Reviewed by: T.L. Date:2/17/0Y ASSETS LIABILITIES Description Current Non-Current Current Non-Current Shareholder Equity Uncorrected Known Errors 3,500 1590 Acc. Depreciation 4590 Depn. Expense 2995 Income Tax Payable Overstatement of Depn. Expense D 1 (3,500) 1,750 (1,750) Uncorrected Projected Errors 4200 COGS 1200 Inventory 2995 Income Tax Payable Overstatement of Ending Inventory projected from a statistical sample C 1 8,000 (4,000) (8,000) 4,000 immaterial Other Estimated Errors 0 0 0 0 0 Aggregate likely error 2% 5% 1% 0% 4% (8,000) Aggregate likely error 3,500 2,250 0 2,250 Final Trial Balance 400,000 735,000 225,000 375,000 535,000
The Opinion on the Financial Statements • Each staff auditor summarizes their own section • Reviewed by audit senior and manager • Who has ultimate responsibility? • Audit meeting with client
Review of Working Papers • First level review • Manager review • Partner-in-charge review • work done accurate and thorough • judgements exercised were reasonable • audit completed according to engagement letter • significant questions resolved • working papers support opinion • GAAS have been met
Technical Review of Financial Statements • Publicly held companies • Partner not a member of the audit team • Checklist
Communication of Material Weaknesses • Material weaknesses in internal control • what part of the audit does this result from? • Orally or in writing? • How are such weaknesses communicated?
Management Letter • Recommendations for improving the efficiency and effectiveness of matters observed in the audit • What provides the documentation for the components of the letter? • Includes comments on: • internal control weaknesses • AIS and EDP • management of resources • tax-related matters
I.M. Capable & Co. Chartered Accountants Toronto, Ontario Ms. T.P. Black March 31,200Y President, ABC Inc. 825 Willowbank Ave. Toronto, Ontario Dear Ms. Black: Our examination of the financial statements of ABC Inc. for the year ended December 31, 200X has disclosed certain opportunities for improvements in your organization and operations. Items that we believe should be brought to your attention are set forth below. Internal Accounting Control One individual is both the cashier and custodian of marketable securities. We believe these duties should be segregated between two employees in order to minimize the possibility of unauthorized purchases and sales of marketable securities.
Data Processing Because of the size of the Company and the widespread geographic location of its operations, we believe you should begin to develop a long-range data processing plan. Without such a plan the Company might find itself in the position of utilizing several service bureaus, developing non-coordinated procedures, or possibly acquiring small pieces of equipment at outlying locations that are not compatible. Insurance Coverage The Company presently carries life insurance coverage on the President. We recommend that life insurance coverage be considered for other executives vital to the Company's continued success. This letter is issued solely for the information of the Company’s management; it should not be presented or quoted to anyone outside the Company. We would be pleased to discuss the matters reported or to answer any questions you may have at your convenience. Yours very truly, I.M. Capable I.M. Capable & Co. Chartered Accountants
Post-Audit Responsibility • Following the completion of fieldwork 1. Subsequent Events • between end of field work and issuance of audit report • CICA 6500, requires audit tests for the event to be extended
If client has correctly accounted for it • what does this mean? • how does this affect the F/S? • Dual Dating • ……December 31, 200X, except for the information in Note A for which the date is February 6, 200Y. • In scope and opinion paragraph • Redating • redating the entire report extends the auditor’s overall responsibility beyond completion of fieldwork to the subsequent event
2. Subsequent Discovery of Facts • audited F/S already issued • no audit responsibility • CICA 5405 • if material, users who rely on the F/S must be informed • Management may decide to • notify users • issued revised F/S • advise appropriate agencies • Issuance of a new audit report
3. Discovery of Omitted Procedures • after the date of the audit report • a procedure has been omitted from the examination • On discovery auditor should: • assess importance of the procedure re the opinion expressed • review working papers • If the opinion cannot be supported by the omitted procedure • what should auditor do?