COMPLETING THE AUDIT
Review for contingent liabilities.
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.
REVIEW FOR CONTINGENT
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.
EXAMPLES OF CONTINGENT
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
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.
AUDIT PROCEDURES FOR
Reading the minutes of board of directors and other
committees of the board.
Reviewing contracts (e.g., loan agreements and
Reviewing income tax liability, tax returns, and IRS
Confirming or otherwise documenting of guarantees
and letters of credit obtained from financial
institutions or other lending agencies.
Inspecting other documents for possible guarantees.
SPECIFIC AUDIT PROCEDURES FOR
Inquiry of and discussions with management about policies and
procedures for identifying, evaluating, and accounting for
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
Obtaining of a legal letter that describes and evaluates any
litigation, claims, or assessments.
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
assertion is probable and loss is reasonably possible.
TYPES OF LITIGATION
Breach of contract
Violations of governmental legislation including:
Securities laws, Antitrust.
Discrimination based on race, sex, age, and other
Foreign Corrupt Practices Act.
Racketeer Influenced and Corrupt Organizations Act
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.)
REVIEW FOR SUBSEQUENT EVENTS FOR
AUDITS OF FINANCIAL STATEMENTS
Subsequent events are events or transactions that
that have a material effect on the financial statements.
TYPE I SUBSEQUENT EVENTS
Events that provide additional evidence about
conditions that existed at the date of the balance
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.
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.
AUDIT PROCEDURES FOR
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.
AUDIT REPORT DATE AND
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
REVIEW OF SUBSEQUENT EVENTS FOR
AUDITS OF INTERNAL CONTROL OVER
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
FINAL EVIDENTIAL EVALUATION
Perform final analytical procedures.
Evaluate the entity's ability to continue as a going
Obtain a representation letter.
Evaluate financial statement presentation and
Make final assessment of audit results.
Review of audit documentation.
Obtain independent review of the engagement.
PERFORM FINAL ANALYTICAL
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.
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.
STEPS IN THE GOING CONCERN
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
INDICATORS OF POTENTIAL
GOING CONCERN PROBLEMS
• Other financial difficulties
• Internal problems
• External matters
STEPS IN THE GOING CONCERN
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.
STEPS IN THE GOING CONCERN
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.
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
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
FINAL EVALUATION OF
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.
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
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.
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.
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.
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.
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.
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
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
COMPLETING THE AUDIT