Completing the Audit Chapter 24 http://downloadslide.blogspot.com ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Design and perform audit tests related to presentation and disclosure audit objectives ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - Presentation and Disclosure Audit Objectives Occurrence and rights and obligations: Disclosed events and transactions have occurred and pertain to the entity Completeness: All disclosures that should have been included in the financial statements have been included ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - Learning Objective Conduct a review for contingent liabilities and commitments ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - Contingent Liabilities A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - Likelihood of Occurrence and Financial Statement Treatment Likelihood of Occurrence of Event Financial Statement Treatment Remote (slight chance) No disclosure is necessary Reasonably possible Footnote disclosure is necessary Probable (likely to occur) Adjust financial statements or note disclosure depending on amounts involved ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - Audit Procedures for Finding Contingencies Audit Procedures Management Inquiry Review BOD Meeting Minutes ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Review Revenue Agent Reports 24 - Audit Procedures for Finding Contingencies Audit Procedures Review legal invoices Obtain attorney letters re: litigation Examine Letters of Credit Review Audit work papers for signs of contingencies ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - Learning Objective Obtain and evaluate letters from the client’s attorneys ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 10 Final Evidence Accumulation The five types of final evidence accumulation Perform final analytical procedures Evaluate the going concern assumption Obtain a management representation letter Consider information accompanying the basic financial statements Read other information in the annual report ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 23 Final Analytical Procedures Partner reads financial statements and footnotes Considers adequacy of evidence Unusual or unexpected balances or relationships ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Unusual items not previously identified 24 - 24 Going Concern Assumption Evaluate a client’s ability to continue operating another year Assess as part of initial planning Update based on audit results ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Use analytical procedures & make final assessment 24 - 25 Management Representation Letter Purposes of the letter: To impress upon management its responsibility for the assertions in the financial statements To remind management of potential misstatements or omissions in the financial statements To document the responses from management to inquiries about various aspects of the audit ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 26 Four Categories in Management Representation Letter Auditing standards suggest four categories of specific matters: Responsibility for financial statements Completeness of information Recognition, measurement, and disclosure ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Recording and disclosing subsequent events 24 - 27 Information Accompanying Basic Financial Statements Balance sheet Income statement Statement of cash flows Basic Standard financial auditor’s statements report Footnotes Detailed comparative statements Statistical data Schedule of insurance coverage ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Information accompanying basic financial statements Separate paragraph – unqualified, qualified, or disclaimer 24 - 28 Learning Objective Integrate the audit evidence gathered and evaluate the overall audit results ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 29 Evaluate Results  Sufficient appropriate evidence  Evidence supports auditor’s opinion  Financial statement disclosures  Audit documentation review  Independent review  Summary of evidence evaluation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 30 Evaluating Results and Reaching Conclusions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 31 Issue the Audit Report The audit report is the only thing that most users see in the audit process, and the consequences of issuing an inappropriate report can be severe ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 32 Learning Objective Communicate effectively with the audit committee and management ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 33 Communicate with the Audit Committee and Management     Communicate fraud and illegal acts Communicate internal control deficiencies Other communication with audit committee Management letters ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 34 Learning Objective Identify the auditor’s responsibilities when facts affecting the audit report are discovered after its issuance ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 24 - 35 Review for Subsequent Events and Discovery of Facts Client’s ending balance sheet date 12-31-09 Audit report date Date client issues financial statements 3-11-10 3-26-10 Period to which Period for review for processing subsequent the financial events applies statements ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Period in which subsequent discovery of facts is made 24 - 36 End of Chapter 24 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 24 - 30 Evaluating Results and Reaching Conclusions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 24 - 31 ... Publishing, Auditing 14/e, Arens/ Elder/Beasley 24 - Learning Objective Conduct a review for contingent liabilities and commitments ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley... Publishing, Auditing 14/e, Arens/ Elder/Beasley 24 - Learning Objective Obtain and evaluate letters from the client’s attorneys ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley