Good Review Requires More Than Looking At Working Papers Good Review Requires More Than Looking At Working Papers

PHASE IV : WRAP-UP ACTIVITIES CONTINGENCIES SUBSEQUENT EVENTS FINAL ANALYTICAL REVIEW EVALUATE GOING CONCERN CLIENT REP. LETTER EVALUATE RESULTS OTHER INFORMATION IN ANNUAL REPORTS COMMUNICATION WITH AUDIT COMMITTEE MANAGEMENT LETTER

REQUIRED COMMUNICATION WITH AUDIT COMMITTEE Irregularities and illegal acts Significant control weaknesses Other matters: –Financial statement adjustments –Disagreements with management –Difficulties encountered in the audit

Types of WhoWhen Review DoesDonePurpose In-charge review Audit partner review Independent review Peer review

Final Evidence Accumulation  Perform Final Analytical Procedures  Evaluate Going Concern Assumption  Obtain Management Representation Letter  Read Other Information in the Annual Report

1. Examination of prior year’s working papers a. a. Were last year’s working paper and review notes examined for areas of emphasis in the current-year audit? b. b. Was the permanent file reviewed for items that affect the current year? Internal control 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? 3. General documents a. Were 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

Evaluating Results and Reaching Conclusions on the Basis of Evidence in the CYCLE, ACCOUNT, AND THE OVERALL FS PRESENTATION Evaluating Results and Reaching Conclusions on the Basis of Evidence in the CYCLE, ACCOUNT, AND THE OVERALL FS PRESENTATION

A Contingent Liabilities A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. What if it’s probable & reasonably est? A contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. What if it’s probable & reasonably est?

Certain contingent liabilities are of considerable concern to the auditor: Certain contingent liabilities are of considerable concern to the auditor: Pending litigation for patent infringement, Pending litigation for patent infringement, product liability, or other actions Income tax disputes Income tax disputes Product warranties Product warranties Notes receivable discounted Notes receivable discounted Guarantees of obligations of others Guarantees of obligations of others Unused balances of outstanding letters of credit Unused balances of outstanding letters of credit Pending litigation for patent infringement, Pending litigation for patent infringement, product liability, or other actions Income tax disputes Income tax disputes Product warranties Product warranties Notes receivable discounted Notes receivable discounted Guarantees of obligations of others Guarantees of obligations of others Unused balances of outstanding letters of credit Unused balances of outstanding letters of credit

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 agent reports for income tax settlements. ‹ Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits or other contingencies. ‹ Inquire of management (orally and in writing) about the possibility of unrecorded contingencies. ‹ Review current and previous years’ internal revenue agent reports for income tax settlements. ‹ Review the minutes of directors’ and stockholders’ meetings for indications of lawsuits or other contingencies. continuedcontinued

‹ Analyze legal expense for the period under audit and review invoices and statements from legal counsel. ‹ Obtain a letter for each major attorney performing legal services. ‹ Review working papers for any information that may indicate a potential contingency. ‹ Examine letters of credit in force as of the balance sheet date and obtain a confirmation of the used and unused balance. ‹ Analyze legal expense for the period under audit and review invoices and statements from legal counsel. ‹ Obtain a letter for each major attorney performing legal services. ‹ Review working papers for any information that may indicate a potential contingency. ‹ Examine letters of credit in force as of the balance sheet date and obtain a confirmation of the used and unused balance. Audit Procedures for Finding Contingencies

Typical Inquire of Attorney of Attorney Typical Inquire of Attorney of Attorney

DISTINCTION BETWEEN REVIEW FOR SUBSEQUENT EVENTS AND SUBSEQUENT DISCOVERY OF FACTS AFTER THE BALANCE SHEET DATE DISTINCTION BETWEEN REVIEW FOR SUBSEQUENT EVENTS AND SUBSEQUENT DISCOVERY OF FACTS AFTER THE BALANCE SHEET DATE

Period covered by Subsequent Events Review

Review for Subsequent Events and Subsequent Discovery of Facts Review for Subsequent Events and Subsequent Discovery of Facts

Type I Subsequent Events Type I Subsequent Events Those that have a Direct Effect on the Financial statements and Require Adjustment Declaration of bankruptcy by a customer because of a Declaration of bankruptcy by a customer because of a deteriorating financial condition (deteriorating w/in the BS date). deteriorating financial condition (deteriorating w/in the BS date). Settlement of a litigation that existed at the BS date. Settlement of a litigation that existed at the BS date. Litigation claim based on events covered by the BS date. Litigation claim based on events covered by the BS date. Declaration of bankruptcy by a customer because of a Declaration of bankruptcy by a customer because of a deteriorating financial condition (deteriorating w/in the BS date). deteriorating financial condition (deteriorating w/in the BS date). Settlement of a litigation that existed at the BS date. Settlement of a litigation that existed at the BS date. Litigation claim based on events covered by the BS date. Litigation claim based on events covered by the BS date.

Type I Subsequent Events Type I Subsequent Events If it is material and the client won’t adjust the FS’s: 1.EXPLANATORY Paragraph 2.W/hold report 3.W/draw from Engagement (EWW!)

Those that have NO Direct Effect on the Financial Statements but Which Disclosure is Advisable (Interpretation/usefulness of FS’s affected) Those that have NO Direct Effect on the Financial Statements but Which Disclosure is Advisable (Interpretation/usefulness of FS’s affected) Decline in the market value of securities Decline in the market value of securities Issuance of bonds or equity securities Issuance of bonds or equity securities Uninsured loss of PPE or inventories as a result of fire, etc.Uninsured loss of PPE or inventories as a result of fire, etc. A merger or an acquisition/ purchase of a business A merger or an acquisition/ purchase of a business Losses of AR d/t issues arising subsequent to the BS dateLosses of AR d/t issues arising subsequent to the BS date Settlement of litigation, where the issue causing litigation took placeSettlement of litigation, where the issue causing litigation took place s/t the BS date Decline in the market value of securities Decline in the market value of securities Issuance of bonds or equity securities Issuance of bonds or equity securities Uninsured loss of PPE or inventories as a result of fire, etc.Uninsured loss of PPE or inventories as a result of fire, etc. A merger or an acquisition/ purchase of a business A merger or an acquisition/ purchase of a business Losses of AR d/t issues arising subsequent to the BS dateLosses of AR d/t issues arising subsequent to the BS date Settlement of litigation, where the issue causing litigation took placeSettlement of litigation, where the issue causing litigation took place s/t the BS date Type II Subsequent Events Type II Subsequent Events continuedcontinued

Inquire 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 basically READ and REVIEW - SOUNDS LIKE COR (II) A Inquire 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 basically READ and REVIEW - SOUNDS LIKE COR (II) A Audit Tests

Dual-dated audit report means that the audit report includes two dates. 1. The first date is the date for the completion of field work except for a specific exception. 2. The second date, which is always later, deals with the exception. Dual Dating

Review for Subsequent Events and Subsequent Discovery of Facts Review for Subsequent Events and Subsequent Discovery of Facts

Once the report is issued, the auditor has no further obligation to perform additional procedures UNLESS…new material information comes to our attention (don’t have to go looking) Are people attaching importance to the info, likely to rely on the info?

Subsequent Discovery of Facts If it is a material issue, then the auditor must PREVENT further reliance in the report 3 D’s: The auditor can advise the client to disclose the new info: 1. Draft new FS’s/revoke old, 2. Disclose in imminent report (e.g., Qrtly), OR 3. Press Release “DON’T RELY!)

Subsequent Discovery of Facts If the client won’t disclose the new info, then 1.Notify the CLIENT and BOD’s – report can no longer be associated w/ the FS’s 2.Notify REGULATORY AGENCIES – “audit report unreliable!” 3.Notify each PERSON known to be relying - “audit report unreliable!”

Omitted Procedures detected after report date A necessary audit procedure wasn’t performed (perhaps discovered in internal or external peer review) 1.Ask the Q: is the report still reliable? 2.IF NO, or uncertain, DO the procedure 3.Ask again: is the report still reliable? 4.If NO, do the 3 “D’s”