Lecture Auditing and assurance services (Second international edition) Chapter 17 Completing the audit engagement

In this chapter, the learning objectives are Be able to explain the audit issues related to contingent liabilities, know the audit procedures used to identify contingent liabilities, understand the audit issues related to a legal letter, be able to explain why the auditor must be concerned with client commitments.

Completing the Audit

Engagement

Chapter Seventeen

A contingency is a liability that is uncertain because the possible outflow of resources from the entity will ultimately be resolved when some

future event occurs or fails to occur.

A contingency is a liability that is uncertain

because the possible outflow of resources from the entity will ultimately be resolved when some

future event occurs or fails to occur.

Probable: The future event is more likely than not to occur

Neither probable nor remote: The chance of the future event is less likely than not to occur but the chance is more than slight

Remote: The chance of the future event occurring is slight.

Probable: The future event is more likely than not to occur

Neither probable nor remote: The chance of the future event is less likely than not to occur but the chance is more than slight

Remote: The chance of the future event occurring is slight.

Examples

• Pending or threatened litigation

• Actual or possible claims and

assessments

• Income tax disputes

• Product warranties or defect;

• Guarantees of obligations to

others

• Agreements to repurchase

Examples

• Pending or threatened litigation

• Actual or possible claims and

assessments

• Income tax disputes

• Product warranties or defect;

• Guarantees of obligations to

others

• Agreements to repurchase

Audit Procedures for Identifying

Contingencies

Read minutes of meetings

of those charged with

governance, e.g the board

of directors.

Review contracts, loan agreements, leases and correspondence from government bodies.

Confirm or otherwise

document guarantees and

letters of credit.

Inspect other documents for possible guarantees.

Review tax returns, tax liability and tax authorities’

reports.

Audit Procedures for Identifying

Contingencies

Inquiry and discussion with

management about its policies

and procedures for identifying,

evaluating and accounting for

contingencies.

Examine documents in the entity’s records such as correspondence and invoices from lawyers for pending or threatened lawsuits.

Obtain a legal letter that

describes and evaluates any

litigation, claims or assessments.

Obtain written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed in accordance with the applicable financial reporting

Specific Audit Procedures Conducted

Near Completion of Audit

Legal Letters

A letter of audit inquiry ( a legal letter ) sent to the client’s lawyers is the primary means of obtaining or corroborating information about

litigation, claims and assessments

Example of Legal Letter

Commitments

Long-term commitments are usually identified through inquiry of client personnel during the audit of the revenue and purchasing processes In most cases, such commitments are disclosed in a note

to the financial statements.

Long-term contracts to purchase raw materials or sell their products at a fixed

price.

Long-term contracts to purchase raw materials or sell their products at a fixed

price.

To obtain a favourable pricing arrangement.

To obtain a favourable pricing arrangement.

To secure the availability of raw materials

To secure the availability of raw materials

Review for Subsequent Events

Balance Sheet Date

Type I Event

Conditions existed at

the balance sheet date

and affect estimates

that are part of

financial statements

Type II Event

Conditions did not exist

at the balance sheet date and do not affect the accuracy of the financial statements

Require adjustment of

the financial statements.

Require financial statement disclosure.

Auditor’s Responsibilities Regarding

Subsequent Events

Subsequent Events after the Date of the

Audit Report

inquiries or conducting any audit procedures after the date of the audit

report.

attention after the date of the audit report

had the auditor known about them Auditing standards (ISA 560) provide guidance to auditors in this exceptional circumstance.

Audit Procedures to Look for Subsequent

Events

Inquire of Management

Read Interim Financial Statements

Examine the Books of Original Entry

Examples of audit

procedures

Read Minutes

of Meetings

Inquire of Legal Counsel

Final Evidence Evaluation Processes

Perform final analytical procedures.

Evaluate entity’s ability to continue

as a going concern.

Obtain a representation

letter.

Review working

papers.

Evaluate final of audit results.

Evaluation of financial statement presentation and disclosure.

Obtain a quality control review of the engagement.

Going-Concern Considerations

Going-Concern Considerations

Representation Letter

Representation Letter (continued)

Proposed Adjusting Entries

Other Final Evidence Evaluation Processes

Archiving and Retention

ISQC1 requires audit documentation to be retained

ordinarily for minimum five years from the date of the auditor’s report.

Archiving and Retention

ISQC1 requires audit documentation to be retained

ordinarily for minimum five years from the date of the auditor’s report.

Evaluating Financial Statement Presentation and Disclosure

The auditor reviews the financial statements to ensure compliance

with the applicable financial reporting framework, proper presentation of accounts, and inclusion of all necessary disclosures

Engagement Quality Control Review

An engagement quality control reviewer objectively evaluates

the significant judgements that the engagement team made and the conclusions it reached in formulating the auditor’s report.

Communication with those Charged with

Governance and Management

End of Chapter 17