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Chapter 11 Completing the Audit It ain t over till it s over. Yogi Berra, former catcher for the New York Yankees 11-2
Learning Objectives 1. Identify major activities performed by auditors in completing the substantive procedures following the date of the financial statements. 2. Understand the role of attorney letters in evaluating litigation, claims, and assessments. 3. Explain why auditors obtain written representations and identify the key components of written representations. 4. Identify the final steps in the completion of an audit. 5. Understand auditors responsibility for subsequent events and subsequently discovered facts. 6. Identify important activities and communications following the completion of the audit and audit report release date. 11-3
Timeline for Major Activities in Audit Beginning of year Year-End Date (date of the financial statements) Date of the auditors report (audit completion date) Audit report release date Interim testing (tests of controls and substantive procedures Completing substantive procedures Attorney s letters Written representations Going-concern assessment Adjusting journal entries Audit documentation review Subsequent events Subsequently discovered facts Subsequently discovered facts Omitted audit procedures Management letter Communications with those charged with governance 11-4
Procedures Prior to the Audit Report Release Date Completing substantive procedures Attorney s letters Written representations Going-concern assessment Adjusting entries Audit documentation review Subsequent events Subsequently discovered facts 11-5
Completing Substantive Procedures Roll-forward procedures: Extend work from interim period to date of the financial statements Include both tests of controls and substantive procedures Performed following date of the financial statements Idea is to obtain evidence through the date of the financial statements 11-6
Completing Substantive Procedures Analytical procedures: Study of relationships among financial and nonfinancial data Can be used in planning, substantive testing, and review (completion) stages In completion stages of audit, analytical procedures identify unusual or unexpected relationships not previously identified Review accounts for miscellaneous, other, and clearing accounts (may relate to earnings management) 11-7
Completing Substantive Procedures Accounting estimates: Examples include future cash flows in evaluating asset impairments, allowance for doubtful accounts for receivables, and depreciation lives for fixed assets Review management s process for developing estimates Review estimates for reasonableness 11-8
Procedures Prior to the Audit Report Release Date Completing substantive procedures Attorney s letters Written representations Going-concern assessment Adjusting entries Audit documentation review Subsequent events Subsequently discovered facts 11-9
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 Attorney s letters 11-10
Attorney s Letters 3 Attorney Letter (with response) AUDITORS 1 ATTORNEY Attorney Letter 2 Auditors Request Client to Send Attorney Letter CLIENT 11-11
Attorney s Letters: Responsibilities Auditors Initiate request for attorney letter Client Prepare listing, description, and evaluation of litigation, claims, and assessments for letter Send letter to attorney including information related to litigation, claims, and assessments Attorney Respond to auditors regarding client s description of litigation, claims, and assessments contained in attorney letter 11-12
Attorney s 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 Understanding regarding unasserted claims 11-13
Procedures Prior to the Audit Report Release Date Completing substantive procedures Attorney s letters Written representations Going-concern assessment Adjusting entries Audit documentation review Subsequent events Subsequently discovered facts 11-14
Written Representations Provided by management to auditors Dated using date of auditors reports (audit completion date) Broad purpose Impress upon management its primary responsibility for the financial statements May establish auditors defense if a question related to inquiries subsequently arises Qualify or disclaim an opinion if not provided by the client 11-15
Contents of Written Representations Information related to financial statements Management s responsibility for F/S and internal control over financial reporting Appropriate disclosure, presentation, and reasonableness of items Statement that uncorrected misstatements are immaterial Information provided to auditors by management Internal control over financial reporting (for public entities) 11-16
Procedures Prior to the Audit Report Release Date Completing substantive procedures Attorney s letters Written representations Going-concern assessment Adjusting entries Audit documentation review Subsequent events Subsequently discovered facts 11-17
Going-Concern Assessment Auditors required to consider whether evidence obtained during audit raises questions about ability to continue as a going concern If concerns exist, evaluate management s plans to mitigate If concerns do not remain: No effect on report or financial statements If concerns remain: Disclose in F/S and modify auditors report 11-18
Adjusting Entries Accumulate dollar effects of identified misstatements Evaluate materiality Rollover method considers the current period income effect(s) of misstatements Iron curtain method considers the aggregate effect of the adjustments on the entity s balance sheet SAB 108 requires adjustments to be proposed if material under either approach Recommend adjustment of all misstatements identified Carry any uncorrected misstatements forward for consideration in future audits Communicate all adjustments and misstatements to audit committee or individuals charged with governance 11-19
Audit Documentation Review Audit supervisor Have all steps in audit plan 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 Is the quality of audit work and reporting consistent with quality standards of the firm? Engagement quality review 11-20
Procedures Prior to the Audit Report Release Date Completing substantive procedures Attorney s letters Written representations Going-concern assessment Adjusting entries Audit documentation review Subsequent events Subsequently discovered facts 11-21
Timeline and Terms Beginning of year Year-End Date (Date of the Financial Statements) Date of the auditors report (Audit completion date) Audit report release date Subsequent Events Subsequently Discovered Facts Subsequent events occur between the date of the financial statements and date of the auditors report Subsequently discovered facts become known after the date of the auditors report 11-22
Procedures to Identify Subsequent Events Obtain understanding of procedures management performs to identify subsequent events Inquire of management and those charged with governance Read minutes of meetings of owners, management, and those charged with governance Review entity s interim financial statements 11-23
Types of Subsequent Events Provide new information about conditions existing at date of the financial statements Adjust financial statements to reflect new information Involve events that arose following the date of the financial statements Disclose in financial statements 11-24
Subsequently Discovered Facts If discovered prior to audit report release date, perform procedures related to items Revise date of auditors reports to reflect new completion date Dual date auditors reports Following audit report release date: If facts would result in revision of auditors report or F/S and individuals are relying on F/S Notify individuals relying on F/S Issue revised F/S which provide disclosure of facts 11-25
Procedures Following Audit Report Release Date Subsequently discovered facts Omitted procedures Communication with those charged with governance Management letters 11-26
Omitted Procedures Perform procedures if: Omitted procedures are important Individuals are currently relying on financial statements and auditors reports If previous opinion can be supported, no further action necessary If previous opinion cannot be supported Withdraw the original report Issue revised reports Inform persons currently relying on the financial statements 11-27
Communication with Individuals Charged with Governance Auditors responsibility under GAAS Overview of planned scope and timing of audit Judgment about quality of accounting policies, estimates, and disclosures Significant difficulties encountered during audit Uncorrected misstatements Disagreements with management Material, uncorrected misstatements Representations requested from management Management consultations with other auditors Significant issues discussed with management Other findings or issues significant and relevant to those charged with governance 11-28
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 auditors to client following audit engagement 11-29
Summary of Audit Communications Type From To Timing Method Engagement letter Auditors Client Before engagement Acceptance letter Client Auditors Before engagement Attorney letter response Written representations Attorney Auditors Near date of auditors report Client Auditors Date of auditors report Written Written Written Written 11-30
Summary of Audit Communications (Continued) Type From To Timing Method Internal control deficiencies Communication with those charged with governance Management letter Auditors Auditors Individuals charged with governance Individuals charged with governance For public entities, prior to audit report release date After audit Written Oral or written Auditors Client After audit Oral or written 11-31