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					                       17-1




CHAPTER 17

COMPLETING THE AUDIT
ENGAGEMENT
                                                            17-2




            TOPICS COVERED

   Review for contingent liabilities.
   Commitments.
   Subsequent events.
   Final evidential evaluation processes.
   Communications with those charged with
    governance and management.
   Subsequent discovery of facts existing at the date of
    the auditor's report.
                                                          17-3




   REVIEW FOR CONTINGENT
         LIABILITIES

Contingent liabilities are defined as an existing
condition, situation, or set of circumstances involving
uncertainty as to possible loss to an entity that
ultimately will be resolved when some future event
occurs or fails to occur.
                                                     17-4



    EXAMPLES OF CONTINGENT
          LIABILITIES

   Pending or threatened litigation.
   Actual or possible claims and assessments.
   Income tax disputes.
   Product warranties or defects.
   Guarantees of obligations to others.
   Agreements to repurchase receivables that have
    been sold.
                                                             17-5




ACCOUNTING FOR CONTINGENCIES


                     The future event is likely to occur.
                                    The chance of the
    future event occurring is more than remote but
    less than likely.
                     The chance of the future event
    occurring is slight.
                                                       17-6


       AUDIT PROCEDURES FOR
      IDENTIFYING CONTINGENT
            LIABILITIES
   Reading the minutes of board of directors and other
    committees of the board.
   Reviewing contracts (e.g., loan agreements and
    leases).
   Reviewing income tax liability, tax returns, and IRS
    agents' reports.
   Confirming or otherwise documenting of guarantees
    and letters of credit obtained from financial
    institutions or other lending agencies.
   Inspecting other documents for possible guarantees.
                                                                        17-7


SPECIFIC AUDIT PROCEDURES FOR
   IDENTIFYING CONTINGENT
          LIABILITIES
   Inquiry of and discussions with management about policies and
    procedures for identifying, evaluating, and accounting for
    contingent liabilities.

   Obtaining of a representation letter from management that
    includes written representation that all litigation, asserted and
    unasserted claims, and assessments have been disclosed in
    accordance with accounting standards.

   Examination of documents in the entity's records such as
    correspondence and invoices from attorneys for pending or
    threatened lawsuits.

   Obtaining of a legal letter that describes and evaluates any
    litigation, claims, or assessments.
                                                           17-8



               LEGAL LETTERS
   A letter of audit inquiry (referred to as a legal letter)
    sent to each of the client's attorneys is the primary
    means of obtaining or corroborating information about
    litigation, claims, and assessments.
   A legal letter should also be obtained from the entity's
    inside counsel if such a position exists.
   The requests in these inquiries include the following:
    


        including an evaluation of the likelihood of
        unfavorable outcome and the amount or range of
        potential loss.
                                                      where
        assertion is probable and loss is reasonably possible.
                                                             17-9




         TYPES OF LITIGATION

   Breach of contract
   Patent infringement
   Product liability
   Violations of governmental legislation including:
       Securities laws, Antitrust.
       Discrimination based on race, sex, age, and other
        characteristics.
       Income tax.
       Environmental protection.
       Foreign Corrupt Practices Act.
       Racketeer Influenced and Corrupt Organizations Act
        (RICO).
                                                                  17-10




                   COMMITMENTS

   The auditor should also determine if the client has any
    significant commitments, and if so, evaluate if they have
    been properly reported.

       For example, companies enter into long-term
        commitments to purchase raw materials or to sell
        their product at a fixed price.
        (The main purposes for entering into such purchase or
         sales contracts is to obtain favorable pricing arrangements
         or to secure the availability of raw materials.)
                                                          17-11




REVIEW FOR SUBSEQUENT EVENTS FOR
 AUDITS OF FINANCIAL STATEMENTS
   Subsequent events are events or transactions that
   occur


   that have a material effect on the financial statements.
                                                                       17-12




    TYPE I SUBSEQUENT EVENTS
   Events that provide additional evidence about
    conditions that existed at the date of the balance
    sheet.

   Examples of Type I subsequent events:
       A loss of an uncollectible account receivable resulting from
        continued deterioration of its financial condition leading to
        bankruptcy after the balance sheet date.
       The settlement of a lawsuit after the balance sheet date for
        an amount different from the amount recorded in the year
        end financial statements.
                                                                   17-13




    TYPE II SUBSEQUENT EVENTS
   Events that provide evidence about conditions that
    did not exist at the date of the balance sheet but
    arose subsequent to that date.

   Examples of Type II subsequent events:
        Purchase or disposal of a business.
        Sale of a capital stock or bond issue.
        Loss of a manufacturing facility or assets resulting from a
         casualty such as a fire or flood.
        Losses on receivables arising from conditions such as a
         casualty arising subsequent to the balance sheet date.
                                                         17-14




      AUDIT PROCEDURES FOR
       SUBSEQUENT EVENTS
   Ask management about subsequent events.
   Read any interim financial statements that are
    available for the period after year end.
   Examine the books of original entry for the
    subsequent events period.
   Read the available minutes of meetings of board of
    directors and other committees.
   Inquiry of legal counsel concerning litigation,
    claims, and assessments.
   Obtain a representation letter from management.
                                                                  17-15

         AUDIT REPORT DATE AND
          SUBSEQUENT EVENTS
   How do subsequent events impact the audit report date?




    1) Formal subsequent event period - the auditor actively
       conducts audit procedures related to subsequent events.

    2) Part of the subsequent events period, but the auditor is
       not responsible for making inquires or conducting audit
       procedures.
                                                              17-16

REVIEW OF SUBSEQUENT EVENTS FOR
AUDITS OF INTERNAL CONTROL OVER
      FINANCIAL REPORTING
Auditors of public companies are responsible to report on
any changes in internal control that might affect financial
reporting between the end of the reporting period and the
date of the auditor’s report.
Again, there are 2 types of subsequent events:
Type I – reveals information about a material weakness
         that existed as of the end of the reporting period
         (e.g., fraud or error discovered).
Type II – reveals information about an internal control
          condition that did not exist as of the end of the
          reporting period.
                                                        17-17




FINAL EVIDENTIAL EVALUATION
         PROCESSES
     Perform final analytical procedures.
     Evaluate the entity's ability to continue as a going
      concern.
     Obtain a representation letter.
     Evaluate financial statement presentation and
      disclosure.
     Make final assessment of audit results.
        Review of audit documentation.

        Obtain independent review of the engagement.
                                                             17-18




       PERFORM FINAL ANALYTICAL
             PROCEDURES
   The objective of conducting analytical procedures at
    the end of the engagement is to assess the conclusions
    reached on the financial statement accounts.

   Auditing standards require that analytical procedures
    be conducted as an overall review.
                                                          17-19




   EVALUATE GOING CONCERN

Auditing standards state that the auditor has a
responsibility to evaluate whether there is substantial
doubt about the entity's ability to continue as a going
concern for a reasonable period of time, not to exceed
                  beyond the date of the financial
statements being audited.
                                                         17-20



    STEPS IN THE GOING CONCERN
            EVALUATION
   Step 1: Consider if the results of all audit procedures
    performed during the audit indicate whether there is
    substantial doubt about the entity's ability to continue
    as a going concern for a reasonable period of time (one
    year).

          INDICATORS OF POTENTIAL
          GOING CONCERN PROBLEMS
    •
    • Other financial difficulties
    • Internal problems
    • External matters
                                                         17-21




         STEPS IN THE GOING CONCERN
                 EVALUATION
   Step 2: If there is substantial doubt, the auditor should
    obtain information about management's plans to mitigate
    the going concern problem and assess the likelihood that
    such plans can be implemented.

EXAMPLES OF PLANS BY MANAGEMENT
     •   Plans to dispose of assets.
     •   Plans to borrow money or restructure debt.
     •   Plans to reduce or delay expenditures.
     •   Plans to increase ownership equity.
                                                         17-22




    STEPS IN THE GOING CONCERN
            EVALUATION
   Step 3: If the auditor concludes, after evaluating
    management's plans, that the entity has a going
    concern problem, he or she should consider the
    adequacy of the disclosures about the entity's ability
    to continue and include an explanatory paragraph in
    the audit report.
                                                           17-23




         REPRESENTATION LETTER

   Auditing standards require that the auditor obtain a
    representation letter from management.

       Management’s refusal to provide a representation
        letter constitutes a scope limitation.



   The representation letter is signed by the CEO and
    CFO.
                                                          17-24




EVALUATE FINANCIAL STATEMENT
 PRESENTATION AND DISCLOSURE

   The auditor must ensure
      that the financial statements comply with GAAP

      that there is proper presentation of accounts

      there is inclusion of all disclosures



   Most CPA firms use some type of financial statement
    disclosure checklist.
                                                         17-25




            FINAL EVALUATION OF
               AUDIT RESULTS

   The auditor must evaluate the results of the audit
    tests and be concerned with two issues:

       the sufficiency of the audit evidence and

       the effects of detected misstatements.
                                                           17-26




    AUDIT DOCUMENTATION REVIEW

   All audit documentation should be reviewed by an
    audit team member senior to the person preparing
    the audit documentation.

   The reviewer must ensure that
      the audit was properly planned and supervised

      the evidence supports the audit objectives tested

      the evidence is sufficient for the type of audit
       report issued.
                                                             17-27




    INDEPENDENT PARTNER REVIEW

   Most firm have a policy requiring that a concurring
    (or second) partner review the financial statements
    for publicly traded companies and those financial
    statements that are expected to be widely distributed.
                                                                   17-28



        ARCHIVING AND RETENTION
 Sarbanes-Oxley Act and PCAOB’s Documentation Standard:
• Require audit firms to archive their public-company audit files for
  retention within 45 days following the time the auditor grants
  permission to use the auditor’s report in connection with the
  issuance of the company’s financial statements.

• Retain audit documentation for 7 years from the date of
  completion of the engagement, as indicated by the date of the
  auditor’s report, unless a longer period of time is required by law.

• Retain all documents that “form the basis of the audit or review.”

• Include in the audit file for significant matters any document
  created, sent, or received, including documents that are
  inconsistent with a final conclusion.
                                                                             17-29


COMMUNICATIONS WITH THOSE CHARGED
 WITH GOVERNANCE AND MANAGEMENT
Auditing standards require that the auditor communicate certain
matters related to the conduct of the audit to those individuals
responsible for oversight of the financial reporting process. The
communication should address:
   The auditor's responsibility under GAAS.
   Significant accounting policies.
   Management judgments and accounting estimates.
   Significant audit adjustments.
   The auditor’s judgment about the quality of the entity's accounting principles.
   Disagreements with management.
   Consultation with other accountants.
   Major issues discussed with management before the auditor was retained.
   Difficulties encountered during the audit.
   Fraud involving senior management or fraud that causes material misstatement
    of the financial statements.
                                                                               17-30


COMMUNICATIONS WITH MANAGEMENT
    AND THE AUDIT COMMITTEE
As indicated in Chapter 7, the auditor has various communication
responsibilities with respect to the audit of internal control over
financial reporting. These include:
      Communicate in writing to management and the audit committee all
       significant deficiencies and material weaknesses identified during the audit.
      Communicate to management, in writing, all control deficiencies (less
       magnitude than significant deficiencies) identified during the audit and
       inform the audit committee when such a communication has been made.
      Communicate fraud or illegal acts to the appropriate level of management,
       or the audit committee, if senior management is suspected or involved.

It is also normal practice at the end of the engagement for the auditor
to prepare a management letter.
      The general intent of this letter is to make recommendations to the client
       based on observations made during the audit and may include areas such as
       organizational structure and efficiency issues.
                                                           17-31



  SUBSEQUENT DISCOVERY OF
FACTS EXISTING AT THE DATE OF
    THE AUDITOR'S REPORT
   An auditor has no obligation to make any inquiries
    or conduct any audit procedures after the financial
    statements and audit report have been issued.

   However, facts may come to the auditor's attention
    after the issuance of the financial statements which
    may indicate that the financial statements are in
    error and the audit report is affected.
                                                           17-32


    SUBSEQUENT DISCOVERY OF FACTS
      EXISTING AT THE DATE OF THE
        AUDITOR'S REPORT (cont’d)
   If the client refuses to cooperate , the auditor should
    notify the board of directors and take the following
    steps:
      Notify the client that the auditor's report must no
        longer be associated with the financial statements.
      Notify any regulatory agencies having jurisdiction
        over the client that the auditor report can no longer
        be relied upon.
      Notify each person known to the auditor to be
        relying on the financial statements. Usually
        notification to a regulatory agency such as the SEC
        is the only practical way to provide appropriate
        disclosure.
                       17-33




CHAPTER 17

COMPLETING THE AUDIT
ENGAGEMENT

				
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