Auditing and assurance services 14e by arens chapter 24

Learning Objective 1Design and perform audit tests related to presentation and disclosure audit objectives... Audit Procedures for Finding Contingencies Management Inquiry Review Reven

Completing the Audit

Chapter 24

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Learning Objective 1

Design and perform audit tests related to

presentation and disclosure audit

objectives.

Presentation and Disclosure

Audit Objectives

Occurrence and rights and obligations:

Disclosed events and transactions haveoccurred and pertain to the entity

Completeness:

All disclosures that should have beenincluded in the financial statementshave been included

Learning Objective 2

Conduct a review for contingent liabilities

and commitments.

Contingent Liabilities

A contingent liability is a potential future

obligation to an outside party for anunknown amount resulting from activitiesthat have already taken place

Likelihood of Occurrence and Financial Statement Treatment

Auditor’s Concerns

 Pending litigation for patent infringement,

product liability, or other actions

 Income tax disputes

 Product warranties

 Notes receivable discounted

 Guarantees of obligations of others

 Unused balances of outstanding letters of credit

Audit Procedures for Finding

Contingencies

Management

Inquiry

Review Revenue Agent Reports

Review BODMeeting MinutesAudit Procedures

Audit Procedures for Finding

Contingencies

Review legal invoices

Examine Letters of Credit

Obtain attorney letters re: litigationAudit Procedures

Review Audit work papers for signs of contingencies

Learning Objective 3

Obtain and evaluate letters from the client’s attorneys.

Inquiry of Client’s Attorneys

A list including: (1) pending threatened litigation

and (2) asserted or unasserted claims or

assessments with which the attorney

has had involvement

Request that the attorney furnish information

or comment about the progress of each item listed

Inquiry of Client’s Attorneys

A request of the law firm to identify any unlisted

pending or threatened legal actions or a

statement that the client’s list is complete

A statement informing the attorney of the attorney’sresponsibility to inform management of legal mattersrequiring disclosure in the financial statements

and to respond directly to the auditor

Sarbanes-Oxley Act

Congress included provisions in this act directing

the SEC to issue rules requiring attorneys serving

public companies to report material violations

by the company of federal securities laws

The American Bar Association amended its

attorney-client confidentiality rules to permit

attorneys to breach confidentiality if a client

is committing a crime or fraud

Learning Objective 4

Conduct a post-balance-sheet review for

subsequent events.

Period Covered by Subsequent

3-26-10

Audit report date

3-11-10

Period to which review for subsequent events applies processing Period for

the financial statements

Types of Subsequent Events

 Those that have a direct effect

on the financial statementsand require adjustment

 Those that do not have a directeffect on the financial statementsbut for which disclosure is required

 Sale of investments at a price belowrecorded cost

Advisability of Disclosure

 Decline in the market value of securities held for temporary investment or resale

 Issuance of bonds or equity securities

 Decline in the market value of inventory

as a consequence of government action barring further sale of a product

 Uninsured loss of inventories as a result

of fire

 A merger or an acquisition

Audit Tests

1 Procedures normally integrated as

a part of the verification of year-endaccount balances

2 Procedures performed specifically forthe purpose of discovering events ortransactions that must be recognized

as subsequent events

Two categories of audit proceduresfor the subsequent events review:

 Inquire of management

 Correspond with attorneys

 Review internal statements preparedsubsequent to the balance sheet date

 Review records prepared subsequent

to the balance sheet date

 Examine minutes issued subsequent

to the balance sheet date

 Obtain a letter of representation

Audit Tests

Dual Dating

The first date is the date for the completion

of field work except for a specific exception

 The second date, which is always later,deals with the exception

Example: An auditor returned to the client’s premises to

perform audit tests pertaining only to the acquisition and

completes those tests on March 31 The audit report will

be dual-dated as follows: March 11, 2010, except for

note 17, which is dated March 31, 2010

Learning Objective 5

Design and perform the final steps in the

evidence-accumulation segment of the

audit.

1 Perform final analytical procedures.

2 Evaluate the going concern assumption

3 Obtain a management representation letter

4 Consider information accompanying the

basic financial statements

5 Read other information in the annual report

Final Evidence Accumulation

The five types of final evidence accumulation

Final Analytical Procedures

Partner reads financial statements and footnotes

Unusual or unexpected balances or relationships

Going Concern Assumption

Evaluate a client’s ability to continue operating

Update based on audit results

Management Representation

Letter

1 To impress upon management its responsibility

for the assertions in the financial statements

2 To remind management of potential misstatements

or omissions in the financial statements

3 To document the responses from management

to inquiries about various aspects of the audit

Purposes of the letter:

Four Categories in Management Representation

Completeness

of information

Recording and disclosing subsequent events

Information Accompanying Basic Financial Statements

Balance sheet

Income statement

Statement of cash flows

Footnotes Detailed comparative

statements Statistical data

Schedule of insurance coverage

Basic financial statements

Standard auditor’s report

Information accompanying basic financial statements Separate paragraph – unqualified, qualified,

Learning Objective 6

Integrate the audit evidence gathered and

evaluate the overall audit results.

Evaluate Results

 Sufficient appropriate evidence

 Evidence supports auditor’s opinion

 Financial statement disclosures

 Audit documentation review

 Independent review

 Summary of evidence evaluation

Evaluating Results and Reaching

Conclusions

The audit report is the only thing that mostusers see in the audit process, and the

consequences of issuing an inappropriatereport can be severe

Issue the Audit Report

Learning Objective 7

Communicate effectively with the audit

committee and management.

 Communicate fraud and illegal acts

 Communicate internal control deficiencies

 Other communication with audit committee

 Management letters

Communicate with the Audit Committee and Management

Learning Objective 8

Identify the auditor’s responsibilities when

facts affecting the audit report are

discovered after its issuance.

Review for Subsequent Events

and Discovery of Facts

Date client issues financial statements

3-11-10

Period in which subsequent

End of Chapter 24