©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Completing the Audit Chapter 23

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 1 Conduct a review for contingent liabilities and commitments.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Summary of the Audit Process Phase I Phase II Phase III Phase IV Plan and design an audit approach. Perform tests of controls and substantive tests of transactions. Perform analytical procedures and tests of details of balances. Complete the audit and issue an audit report.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Phase IV – Completing the Audit Review for contingent liabilities Review for subsequent events Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. Contingent Liabilities

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Likelihood of Occurrence and Financial Statement Treatment Likelihood ofFinancial Statement Occurrence of EventTreatment Remote (slight chance)No disclosure necessary Reasonably possibleFootnote disclosure ProbableAdjust financial statements OR footnote disclosure

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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 Auditor’s Concerns

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Audit Procedures for Finding Contingencies Inquire of management (orally and in writing) about the possibility of unrecorded contingencies. Review current and previous years’ internal revenue reports for income tax settlements. Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Audit Procedures for Finding Contingencies Analyze legal expenses and review invoices and statements from legal counsel. Obtain a letter from each major attorney of the client as to the status of pending litigation. Examine letters of credit in force. Review audit documentation for any information that may indicate a potential contingency.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 2 Obtain and evaluate letters from the client’s attorneys.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley A list including (1) pending threatened litigation and (2) asserted or unasserted claims or assessments with which the attorney has had involvement. A request that the attorney furnish information or comment about the progress of each item listed. Inquiry of Client’s Attorneys

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley A request for the identification of any unlisted pending or threatened legal action or a statement that the client’s list is complete. A statement informing the attorney of the attorney’s responsibility to inform management of legal matters requiring disclosure in the financial statements and to respond directly to the auditor. Inquiry of Client’s Attorneys

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 3 Conduct a post-balance-sheet review for subsequent events.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Period Covered by Subsequent Events Review Client’s ending balance sheet date Audit report date Date client issues financial statements Period to which review for subsequent events applies Period for processing the financial statements

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Those that have a direct effect on the financial statements and require adjustment Those that have no direct effect on the financial statements but for which disclosure is advisable Types of Subsequent Events

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Declaration of bankruptcy by a customer with an accounts receivable balance Settlement of a litigation at an amount different from the amount recorded on the books Requiring Adjustment

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Disposal of equipment not being used in operations at a price below the current book value Sale of investments at a price below recorded cost Requiring Adjustment

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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 consequence of government action barring further sale of a product Uninsured loss of inventories as a result of fire A merger or an acquisition

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley  Inquiry of management  Correspond with attorneys  Review internal statements prepared subsequent 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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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. Dual Dating

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 4 Design and perform the final steps in the evidence-accumulation segment of the audit.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Information Accompanying Basic Financial Statements Balance sheet Income statement Statement of cash flows Footnotes Basic financial statements Standard auditor’s report

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Information Accompanying Basic Financial Statements Detailed comparative statements Statistical data Schedule of insurance coverage Information accompanying basic financial statements Separate paragraph – unqualified, qualified, or disclaimer

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 5 Integrate the audit evidence gathered, and evaluate the overall audit results.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Sufficiency of evidence Evidence supports auditor’s opinion Financial statement disclosures Audit documentation review Independent review Evaluate Results Summary of evidence evaluation

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley YES NO 1. Examination of prior year’s audit documentation a. Were last year’s audit files examined for areas of emphasis in the current-year audit?___ ___ b. Was the permanent file reviewed for items that affect the current year?___ ___ Completing the Engagement Checklist

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley YES NO 2. Internal control a. Has internal control been adequately understood? ___ ___ b. Is the scope of the audit adequate in light of the assessed control risk? ___ ___ c. Have all major weaknesses been included as reportable conditions in a letter to the audit committee or to senior management?___ ___ Completing the Engagement Checklist

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley YES NO 3. General documents a. Where all current-year minutes and resolutions reviewed, abstracted, and followed up? ___ ___ b. Has the permanent file been updated?___ ___ c. Have all major contracts and agreements been reviewed and abstracted and copied with all existing legal requirements?___ ___ Completing the Engagement Checklist

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Evaluating Results and Reaching Conclusions Actual audit evidence (by cycle, account, and objective) Audit procedures Sample size Items to select Timing Evaluate results (by account and cycle) Estimated misstatement (by account) Achieved audit risk (by account and cycle)

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Evaluating Results and Reaching Conclusions Evaluate overall financial statements Estimated misstatement (overall statements) Achieved audit risk (overall statements) Issue audit report

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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. Issue the Audit Report

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 6 Communicate effectively with the audit committee and management.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Communicate fraud and illegal acts Communicate reportable conditions Other communication with audit committee Management letters Communicate with the Audit Committee and Management

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 7 Identify the auditor’s responsibilities when facts affecting the audit report are discovered after its issuance.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Period Covered by Subsequent Events Review Client’s ending balance sheet date Audit report date Date client issues financial statements Period to which review for subsequent events applies Period for processing the financial statements Period in which subsequent discovery of facts is made

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley End of Chapter 23