Completing the audit
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Completing the Audit. Items to consider. Contingent liabilities Commitments Legal confirmation Subsequent events Final evidence accumulation Analytical procedures Going concern assumption Client representation letter CAS 720 – The annual report Management discussion and analysis (MD&A)

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Items to consider
Items to consider

  • Contingent liabilities

  • Commitments

  • Legal confirmation

  • Subsequent events

  • Final evidence accumulation

    • Analytical procedures

    • Going concern assumption

    • Client representation letter

    • CAS 720 – The annual report

    • Management discussion and analysis (MD&A)

  • Sufficiency of information

  • Unadjusted items

  • Auditor communications

  • Management letter

Contingent liabilities
Contingent Liabilities

  • What is a contingency?

  • An example of a contingent liability

  • What information does the auditor need to obtain?

Searching for contingent liabilities
Searching for Contingent Liabilities

  • Following are a few examples that auditors can use to search for contingent liabilities:

  • What other techniques could the auditor use?

Evaluating known contingent liabilities
Evaluating Known Contingent Liabilities

  • Management’s disclosure needs to be evaluated

  • Based upon the likelihood of the event


  • What is a commitment?

  • Where are they are usually disclosed?

  • The procedures

The importance of contingencies and commitments
The Importance of Contingencies and Commitments

  • GAAP

  • Why?

  • Also future cash flows

Legal confirmation
Legal Confirmation

  • Also called

  • A specific format

  • Used to evaluate two categories of lawsuits:

Legal confirmation letter example
Legal Confirmation Letter Example

(Name of entity, name of other party, nature, amount claimed and current status)

(Indicate likelihood of loss (or gain) and estimated amount of ultimate loss (or gain), if any; or indicate that likelihood is not determinable or the amount is not reasonably estimable.)

ABC Company Ltd.

123 Main Street

Toronto, Ontario

31 January, 201Y

Such & Such

Barristers and Solicitors

765 John Street

Toronto, Ontario

To Whom It May Concern:

In connection with the preparation and audit of our financial statements for the fiscal period ended 31 December 201X 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

Would you please advise us, as of (effective date of response), on the following points:

  • Are the claims and possible claims properly described?

  • Do you consider that our evaluations are reasonable?

  • 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 enquiry 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 of the reply directly to our auditor, GHW & Co. Llp, 321 Yonge Street, Toronto, Ontario

    Yours truly,

    John James, President

    c.c. GHW & Co

Analyzing legal expense
Analyzing Legal Expense

Why analyze legal expenses?

Subsequent events
Subsequent Events

  • What are subsequent events?

  • Up to what date does the auditor examine subsequent events?

Subsequent events time period
Subsequent Events Time Period

Required to obtain evidence for subsequent events

Not required to obtain evidence *

Balance sheet date

Field work completed

Directors approve and sign financial statements

Audit report signed

Audited financial statements released to the public

  • * But if auditor becomes aware of a fact that existed at the date of the audit report

  • And if the auditor had known at that date that this fact could have caused them to modify the report, the auditor should:

Types of subsequent events
Types of Subsequent Events

  • Types of subsequent events:

  • Type 1

  • Events providing additional evidence with respect to conditions

  • Type 2

    • Events providing evidence with respect to conditions

  • Type 1

    • Such events may affect the estimates inherent in the financial statements or indicate that a going concern assumption is not appropriate

    • How to treat this item?

  • Type 2

    • Those events that do not result in changes to amounts in the financial statements

      • However they can be of such significance that disclosure in the financial statements is required.

Subsequent events evidence
Subsequent Events Evidence

  • Management

  • Law firms

  • Internal financial statements

  • Minutes

Final evidence accumulation
Final Evidence Accumulation

The auditor has to gather some final evidence besides the examination of

  • Analytical procedures

  • Evaluation and conclusions regarding going concern concept

  • Client representation letter

  • The annual report and CAS 720

    • This relates to other information in the annual report of which the financial statement are part

Working paper review
Working Paper Review

  • When is a working paper review performed?

  • Who performs the final review?

  • For a high risk engagement

Sufficiency of evidence
Sufficiency of Evidence

  • Who is responsible for this?

  • This is a detailed review

Unadjusted misstatement worksheet
Unadjusted Misstatement Worksheet

  • Also called a Summary of Unadjusted Items

  • What does this worksheet keep track of?

  • The primary us of this worksheet?

  • What happens if the auditor comes to the conclusion that there may be a material misstatement?

Auditor communications
Auditor Communications

  • Communications with management and/or the audit committee

  • The following are required:

Management letter
Management Letter

  • The purpose of a management letter

  • The focus

  • Many auditor combine this with the letter on internal control

Problem 21 17 page 709
Problem 21-17, Page 709

In an examination of Marco Corporation as of December 31, 2009, the following situations exist. No related entries have been made in the accounting records.

  • Marco Corporation has guaranteed the payment of interest on the 10-year, first mortgage bonds of Chen Corp., an affiliate. Outstanding bonds of Chen Corp. amount to $150,000 with interest payable at 8 percent per annum, due June 1 and December1 each year. The bonds were issued by Chen on December 31, 2007, and all interest payments have been met by that company with the exception of the payment due December 1, 2009. Marco Corporation states that it will pay the defaulted interest to the bondholder on January 15, 2010.

  • During the year 2009, Marco Corporation was named as a defendant in a suit by Dalton Inc. for damages for breach of contract. A decision adverse to Marco Corporation was rendered, and Dalton Inc. was awarded $40,000 in damages. At the time of the audit, the case was under appeal to higher court.

  • On December 23, 2009, Marco Corporation declared a common share dividend of 1,000 shares with a stated value of $100,000, payable February 2, 2010, to the common shareholders of record on December 30, 2009.


  • Describe the audit procedures that you would use to learn about each of the above situations.

  • Describe the nature of the adjusting entries or disclosure, if any, that you would require for each of these situations.

    (Adapted from AICPA)

Problem 21 18 page 709
Problem 21-18, Page 709

Melanie Adams is a public accountant in a medium sized public accounting firm and takes an active part in the conduct of every audit she supervises. She follows the practice of reviewing all working papers of subordinates as soon as it is convenient, rather than waiting until the end of the audit.

When the audit is nearly finished, Melanie reviews the working papers again to make sure that she has not missed anything significant. Since she makes most of the major decisions on the audit, there is rarely anything that requires further investigation. When she completes the review, she prepares a draft of the financial statements, gets them approved by management, and has them assembled in her firm’s office. No other public accountant reviews the working papers because Melanie is responsible for signing the auditor’s report.


  • Evaluate the practice of reviewing the working papers of subordinates on a continuing basis rather than when the audit is completed.

  • Is it acceptable for Melanie to prepare the financial statements rather than have the client assume that responsibility?

  • Evaluate the practice of not having a review of the working papers by another public accountant in the firm.

Problem 21 19 page 709
Problem 21-19, Page 709

Ruben Chavez, a public accountant, has prepared a management representation letter for the president and controller to sign. It contains references to the following items:

  • Inventory is fairly stated at the lower of cost or market and includes no obsolete items.

  • All actual and contingent liabilities are properly included in the statements.

  • All subsequent events of relevance to the financial statements have been disclosed.


  • Why is it desirable to have a letter of representation from the client concerning the above matters when the audit evidence accumulated during the course of the engagement is meant to verify the same information?

  • To what extent is the letter of representation useful as audit evidence?

  • List several other types of information commonly included in a letter of representation.

Problem 21 22 page 710
Problem 21-22, Page 710

In analyzing legal expense for Boastman Bottle Company, Bart Little, a public accountant, observes that the company has paid legal fees to three different law firms during the current year. In accordance with his accounting firm’s normal operating practice, Bart requires standard confirmation letters as od the balance sheet date from each of the three law firms.

On the last day of fieldwork, Bart notes that one of the confirmations has not yet been received. The confirmation from the second law firm contains a statement to the effect that the law firm deals exclusively in registering patents and refuses to comment on any lawsuits or other legal affairs of the client. The confirmation letter from the third law firm states that there is an outstanding bill due from the client and recognizes the existence of a potentially material lawsuit against the client but refuses to comment further to protect the legal rights of the client


  • Evaluate Bart’s approach to requesting the confirmations and his follow-up on the responses.

  • What should Bart do about each of the confirmations?