ACCT 4240 - Auditing

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					ACCT 4240 - Auditing

       Completing the Audit
Audit Procedures that Cannot be
Completed before the End of Audit
Field Work
• Obtain the letter of inquiry from the client’s legal
• Obtain the client representations letter
• Perform other procedures to identify subsequent
• Complete the review of the audit working papers
• Review the form and content of the financial
• Analytical procedures
Search for commitments and/or
 • Obtain a summary of letters of credit in
   force at balance sheet date and confirm
   used and unused balances
 • Review contracts, loan agreements,
   leases, etc., for indication of other
 • Review IRS agent’s reports for evidence
   of tax settlements or disagreements
  Search for commitments
  and/or contingencies
• Review correspondence with financial institutions for
  evidence of endorsements of indebtedness of others,
  guarantees of indebtedness, or sales or assignments of
  accounts receivable
• Review minutes of meetings of board of directors and
  stockholder’s meetings for indications of lawsuits and other
• Analyze legal expense to identify all lawyers consulted and
  review invoices from lawyers to identify potential
 Lawyer’s Letter
• Send audit inquiry letter to client’s lawyer inquiring
    Asserted claims
    Unasserted claims that are probable of assertion and
     are reasonably possible or probable of an
     unfavorable outcome
    The lawyer’s advisory responsibility pertaining to
     undisclosed unasserted claims
  Lawyer’s Letter
• Lawyers can disclose to auditor asserted
  claims not disclosed by the client
• Lawyers cannot disclose unasserted claims -
  only the client can disclose
• If client refuses to disclose an unasserted
  claim to auditor, lawyer may resign
Attorney Letters: Responsibilities
• Auditor
   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 auditor regarding client’s description of
    litigation, claims, and assessments contained in attorney
Attorney Letters: Contents
• Listing of pending litigation, claims, and
• Description of each item or case included in
  the listing
• Evaluation of the likelihood of an unfavorable
• Estimate of the range of potential loss
• Understanding regarding unasserted claims
Management Representations
• Provided by management to the auditor
• Dated the last day of fieldwork
• Broad purpose
   Impress upon management its primary responsibility for
    the financial statements
   May establish an auditor’s defense if a question related
    to inquiries subsequently arises
• Qualify or disclaim an opinion if not provided by the
Adjusting Journal Entries
• Accumulate proposed entries on “score sheet”.
• Consider pre tax and after tax effects.
• Require adjustment for all material entries.
• Require adjustment for proposed entries totaling a
  material amount
• Require adjustment for “qualitatively material”
• Recommend adjustment for all other items
Subsequent Events and Subsequent
Balance   Type I and   Report date      Dual        Report date of        Subsequent
sheet     type II      (field work      dating in   issue  registration   discovery
date      subsequent   completed)       report      date   under 1933     of facts
          events                                           act

   SAS No. 1, AU 560          SAS No. 1, AU 530               SAS No. 1, AU 561

                                     SAS No. 37, AU 711
  Subsequent Events
• Events providing additional evidence about
  conditions that existed at the balance sheet
  date and that affect the estimates inherent in
  financial statement preparation

• Events that provide information about
  conditions that did not exist at balance sheet
  date but that arose subsequent to that date
Subsequent Events
• Type I
   Provide new information about conditions existing at
    balance sheet date
   Adjust financial statements to reflect new information
• Type II
   Involve events occurring after balance sheet date
   Disclose in financial statements
   Prepare pro forma financial statements
When are Subsequent Events
• Prior to last day of fieldwork
   Perform audit procedures and ensure proper
• Following last day of fieldwork but prior to
  issuance of reports
   Dual date audit report
• Following issuance of audit reports
   “Subsequent discovery of facts”
 Evaluate Going Concern
• Negative trends
• Defaults on loans, dividends in arrears, denial of
  credit, restructuring of debt, noncompliance with
  statutory requirements
• Labor difficulties, substantial dependence on a
  single project
• Legal proceedings, legislation, loss of a key
  franchise or patent, loss of a principal customer
  or supplier, uninsured catastrophe
Going Concern

• Opportunities for entity to continue as a
  going concern
   Ability to dispose of assets
   Ability to borrow or restructure debt
   Ability to increase ownership
   Ability to reduce or delay expenditures
Client Representation Letter
 • Drafted by the auditor but typed on client letterhead
 • Signed by chief executive officer and chief financial
 • Dated as of the last day of field work
 • Stresses to management its responsibility for the
   representations in the financial statements
 • Documents the responses management made to
   inquiries during the audit
Finalize Audit Opinion

• Perform final analytical review
• Make a final assessment of materiality and
  audit risk
• Complete a financial statement disclosure
• Review the engagement checklist
Communication of Internal
Control Structure Matters
• SAS No. 60
   Communicate with audit committee
   Identify deficiencies in internal control
    structure design and provide suggestions
   Identify failures in the operations of the
    existing internal control structure and
    provide possible solutions
Other Communications with
• Suggested methods of improving business
  operations or income taxes
• Absence of a sufficient level of control
  consciousness within the organization
• Undisclosed related party transactions
Other Communications with
• SAS No. 89-Audit Adjustments:
   Management must agree in engagement letter
    to record any adjustments considered to be
    material, either individually or in the aggregate
   Management must acknowledge in
    management representation letter that any
    unrecorded misstatements are immaterial
   Auditor must provide to the audit committee
    information about any misstatements not
    recorded by management due to immateriality
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
• Delivered by auditor to client following audit
Responsibilities after Report
• Subsequent discovery of existing facts
    Verify information, the effect on financial statements,
     and determine who is relying on the report
    Issue revised report, or
    Client should contact all known users or potential users
     of statements and notify them that they should not rely
     on the statements
 Responsibilities after Report
• If client refuses to notify known users,
  auditor must:
   notify client that statements may no
    longer be relied on
   notify appropriate regulatory agencies
   notify individuals known to be relying on
 Responsibilities after Report
• Subsequent discovery of omitted
   Perform the procedure(s) to determine if
    the previously expressed opinion can be
   If opinion cannot be supported, follow
    steps for subsequent discovery of
    existing facts
NEXT: Final Exam!!
               5.30-7.30 pm

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