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Chapter 14

Chapter 14. Completing the Audit. Final Review of the Audit. Contingencies Collectibility of receivables and loans Product warranty liability Threat of exploration of assets in a foreign country Litigation, claims, and assessments Guarantees of debts of others

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Chapter 14

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  1. Chapter 14 Completing the Audit

  2. Final Review of the Audit • Contingencies • Collectibility of receivables and loans • Product warranty liability • Threat of exploration of assets in a foreign country • Litigation, claims, and assessments • Guarantees of debts of others • Obligations of banks under standby letters of credit.

  3. Final Review of the Audit • Contingencies (cont.) • Agreements to repurchase receivables that have been sold • Purchase and sale commitments. • Responsibilities Related to Contingencies • Sources of Evidence of Contingencies • Letter of Audit Inquiry • Effect of audit contingency on audit report.

  4. Adequacy of Disclosure • Disclosure can be on the face of the financial statements • Classifications • Parenthetical notations • Footnote • Disclosures must be adequate

  5. Management Representation Letter • Auditor should obtain at the end of the audit • Management refusal is considered a scope limitation sufficient to preclude an unqualified opinion • Purposes • Reminds management of responsibility for the financial statements • Confirms oral responses • Reduces possibility of misunderstandings

  6. Management Letter • Letter from auditor to the management with constructive observations • DO NOT CONFUSE WITH MANAGEMENT REPRESENTATION LETTER. Not required but seen as value-added auditing

  7. Going Concern • Auditors are required to evaluate likelihood of going concern. • Evaluation made based on information obtained from normal audit procedures • Indicators of problems • Negative trends • Internal matters • External matters • Other matters (bankruptcy prediction models)

  8. Going Concern Mitigating Factors Effects on the financial statements Effects on the Audit Report • Review of Major Estimates • Responsible for providing reasonable assurance that • Management has info system to develop estimates • Estimates are reasonable • Estimates presented in conformance with GAAP

  9. Analytical and Quality Review • Revenue and expenses • Final review stage • adequacy of evidence • unusual or unexpected balances • adequacy of disclosure • Internal Quality Review Process • Concurring partner or cold review

  10. Communicating with the Audit Committee • Processes for making sensitive estimates • Significant audit adjustments • Major accounting and reporting disagreements • Management’s discussion with other CPA firms • Difficulties encountered in performing the audit • Significant fraud or other illegal acts • Significant deficiencies in internal control • Any independence issues

  11. Type I conditions that existed at the balance sheet date I Subsequent Events • Two types of events identified as subsequent • Major company files bankruptcy • Lawsuit settled for different than accrual • Stock dividend or split • Sale of inventor below carrying value

  12. II Type II subsequent events Subsequent Events • Uninsured casualty • Significant lawsuit • Natural disaster • Major decisions such as a merge • Material change in value of investments

  13. Subsequent Events • Audit Procedures • Read minutes of meetings • Read interim financial statements • Inquire of management concerning • significant changes in interim statements • significant contingent liabilities • significant changes in working capital, long term debt or owners equity • status of tentative items • unusual adjustments

  14. Subsequent Events • Procedures (cont) • Inquire of management and legal counsel concerning contingencies. • Obtain Management Representation Letter

  15. Subsequent Events • Dual Dating • When an event occurs after the end of fieldwork but before issuance of the audit report there are two options. • 1) use the date of event as date of report • 2) Dual Date the report, use the dates of end of fieldwork and the event.

  16. Subsequent Events • Subsequent discovery of facts existing at the date of the auditor’s report • Auditor must determine • Reliability of new information • Whether the event had occurred by the report date • Whether users are likely to be relying on statements • Whether the audit report would have been affected had the facts been known

  17. Subsequent Events Subsequent discovery of facts existing at the date of the auditor’s report Actions • Revise financial statements • Explanation in subsequent statements • If revising must notify users. • Consideration of Omitted Procedures after the Report Date

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