1. Chapter 11 Completing the Audit “It ain’t over till it’s over.”
– Yogi Berra, former catcher for the New York Yankees
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Considerations in Completing the Audit
11-2
Considerations in Completing the Audit
Roll-forward work
Revenue and expense accounts
Attorney letters
Management representations
Going-concern assessment
Adjusting entries
Subsequent events
Audit documentation review
Subsequent discovery of facts
Omitted audit procedures
Management letter
Communications with those charged with governance

3. Major Activities in Audit
11-3
Major Activities in Audit
Beginning End of Audit completion Audit report
of year year date release date
Interim testing “Roll-forward” work Subsequent events Subsequent discovery of facts
(tests of controls Revenue and expenses (dual-dating) Omitted audit procedures
and substantive Attorney letters Management letter
procedures) Management representations Communications with those
Going-concern assessment charged with governance
Adjusting entries
Subsequent events
Audit documentation review

4. Activities Between End of Year and Audit Completion Date
11-4
Activities Between End of Year and Audit Completion Date
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review

5. Revenue and Expense Accounts
11-5
Revenue and Expense Accounts
Substantive procedures for related balance sheet accounts
Analytical procedures
Scan accounts for large and unusual entries
Be aware of “miscellaneous,” “other,” and “clearing” accounts – “earnings management”

6. Activities Between End of Year and Audit Completion Date
11-6
Activities Between End of Year and Audit Completion Date
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review

7. Procedures for Litigation, Claims, and Assessments
11-7
Procedures for Litigation, Claims, and Assessments
Inquiry of clients
Review minutes of meetings of stockholders, directors, and committees
Review contracts, loan agreements, and correspondence from taxing and governmental agencies
Obtain information concerning guarantees from bank confirmations
Review documentation related to legal services

8. Attorney Letters: Responsibilities
11-8
Attorney Letters: Responsibilities
Auditors
Initiate request for attorney letter
Client
Prepare listing, description, and evaluation of litigation, claims, and assessments for letter
Send letter to attorney including information related to litigation, claims, and assessments
Attorney
Respond to auditors regarding client’s description of litigation, claims, and assessments contained in attorney letter

9. Attorney Letters: Contents
11-9
Attorney Letters: Contents
Listing of pending litigation, claims, and assessments
Description of each item or case included in the listing
Evaluation of the likelihood of an unfavorable outcome
Estimate of the range of potential loss
Understanding regarding unasserted claims

10. Activities Between End of Year and Audit Completion Date
11-10
Activities Between End of Year and Audit Completion Date
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review

11. Management Representations
11-11
Management Representations
Provided by management to auditors
Dated using audit completion date
Broad purpose
Impress upon management its primary responsibility for the financial statements
May establish auditors’ defense if a question related to inquiries subsequently arises
Qualify or disclaim an opinion if not provided by the client

12. Management Representations
11-12
Management Representations
Required without regard to materiality:
Management responsibility for the fairness of the financial statements
Availability of all financial records and data
Management responsibility for design and implementation of programs and controls related to fraud
Disclosure of significant deficiencies in internal control
Information concerning fraud involving the client

13. Representations Related to I/C
11-13
Representations Related to I/C
If subject to requirements of AS 5
Management has performed as assessment of I/C
Management’s conclusion with respect to the operating effectiveness of its I/C
No subsequent changes in I/C that significantly affect I/C
No control deficiencies from prior engagements have not been properly resolved

14. Adjusting Journal Entries
11-14
Adjusting Journal Entries
Accumulate proposed entries on “score sheet”
Consider pre tax and after tax effects
Require adjustment for all material entries
Require adjustment for proposed entries totaling a material amount
Require adjustment for “qualitatively material” entries
Recommend adjustment for all other items

15. Evaluating Materiality
11-15
Evaluating Materiality
Rollover method considers the current period income effect(s) of misstatements
Iron curtain method considers the aggregate effect of the adjustments on the entity’s balance sheet
SAB 108 requires adjustments to be proposed if material under either approach

16. Activities Between End of Year and Audit Completion Date
11-16
Activities Between End of Year and Audit Completion Date
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review

17. Subsequent Period 11-17 Audit Audit report
Beginning End of completion release
of year year date date
Subsequent
Period
Audit Procedures
Auditors perform procedures to evaluate events that may affect presentation and disclosure in the financial statements
Events occurring during this period are known as subsequent events

18. Procedures in Subsequent Period
11-18
Procedures in Subsequent Period
Review latest interim financial statements
Inquire of officers and other executives
Read minutes of meetings of shareholders, directors, and committees
Obtain responses to attorney letters
Obtain management representations

19. Subsequent Events Type I Type II 11-19
Provide new information about conditions existing at balance sheet date
Adjust financial statements to reflect new information
Type II
Involve events occurring after balance sheet date
Disclose in financial statements
Prepare pro forma financial statements

20. When are Subsequent Events Identified?
11-20
When are Subsequent Events Identified?
Prior to audit completion date
Perform audit procedures and ensure proper disclosure
Following audit completion date but prior to audit report release date
Dual date audit report
Following audit report release date
“Subsequent discovery of facts”

21. Activities Between End of Year and Audit Completion Date
11-21
Activities Between End of Year and Audit Completion Date
Revenue and expense accounts
Attorney letters
Management representations
Subsequent events
Audit documentation review

22. Audit Documentation Review
11-22
Audit Documentation Review
Audit supervisor
Have all steps in audit program been performed?
Is referencing among documentation clear?
Are explanations understandable?
Audit manager and partner
Is the overall scope of the audit adequate?
Do overall conclusions support the opinion?
Reviewing partner
Are the quality of audit work and reporting consistent with quality standards of the firm?

23. Activities Following Audit Report Release Date
11-23
Activities Following Audit Report Release Date
Subsequent discovery of facts
Omitted procedures
Communication with audit committee (or those charged with governance)
Management letters

24. Subsequent Discovery of Facts
11-24
Subsequent Discovery of Facts
Require disclosure of events if:
Facts are reliable and existed at report date
Facts affect financial statements and auditors’ reports
Persons are continuing to rely on financial statements and auditors’ reports
If client refuses disclosure, auditors should inform board that he or she will notify regulatory agencies and others relying on the reports

25. Omitted Procedures Perform procedures if:
11-25
Omitted Procedures
Perform procedures if:
Omitted procedures are important
Individuals are currently relying on financial statements and auditors’ reports
If previous opinion can be supported, no further action necessary
If previous opinion cannot be supported
Withdraw the original report
Issue revised reports
Inform persons currently relying on the financial statements

26. Communication with Individuals Charged with Governance
11-26
Communication with Individuals Charged with Governance
Auditors’ responsibility under GAAS
Overview of planned scope and timing of audit
Judgment about quality of accounting policies, estimates, and disclosures
Significant difficulties encountered during audit
Uncorrected misstatements
Disagreements with management
Material, uncorrected misstatements
Representations requested from management
Management consultations with other auditors
Significant issues discussed with management
Other findings or issues significant and relevant to those charged with governance

27. Management Letters Not required under GAAS
11-27
Management Letters
Not required under GAAS
Are prepared as a by-product of procedures performed in audit
Provide recommendations to client for improving effectiveness and efficiency of operations
Delivered by auditors to client following audit engagement

28. Summary of Audit Communications
11-28
Summary of Audit Communications