1. 21 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 21 Completing the Audit

2. 21 - 2 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. What is a contingent liability and what are the relevant related GAAP recommendations?

3. 21 - 3 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. What is a contingent liability and what are the relevant GAAP recommenda- tions? a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place

4. 21 - 4 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. likely and reasonably estimated - accrual likely and not estimable - footnote disclosure not determinable - footnote disclosure unlikely - no financial statement or disclosure unless significant adverse effect What is a contingent liability and what are the relevant GAAP recommenda- tions?

5. 21 - 5 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. Footnote disclosure should describe the contingency and the opinion of legal counsel or manage- ment regarding the expected outcome. What is a contingent liability and what are the related GAAP recommenda- tions?

6. 21 - 6 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. - enquire of management

7. 21 - 7 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. - enquire of management - review: ~ client copies of Revenue Canada correspondence ~ minutes of board and shareholder meetings ~ invoices from client lawyers ~ existing audit workpapers ~ contracts, agreements, etc.

8. 21 - 8 Copyright  2003 Pearson Education Canada Inc. Audit Completion Procedures Search for unrecorded contingent liabilities. - enquire of management - review: ~ client copies of Revenue Canada correspondence ~ minutes of board and shareholder meetings ~ invoices from client lawyers ~ existing audit work papers ~ contracts, agreements, etc. - obtain letters of confirmation from all client lawyers Jill Auditor, CA Joe Lawyer Canada48

9. 21 - 9 Copyright  2003 Pearson Education Canada Inc. Lawyer Enquiry The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the auditor concerning:

10. 21 - 10 Copyright  2003 Pearson Education Canada Inc. Lawyer Enquiry The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the client with a copy to the auditor concerning: - client’s description of the nature & current status of all outstanding & possible claims with which the lawyer has been involved

11. 21 - 11 Copyright  2003 Pearson Education Canada Inc. The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the auditor concerning: - client’s description of the nature & current status of all outstanding & possible claims with which the lawyer has been involved - client’s evaluation of the amount & likelihood of loss or gain for each listed outstanding & possible claim Lawyer Enquiry

12. 21 - 12 Copyright  2003 Pearson Education Canada Inc. The auditor should ask the client to prepare a letter (on client letterhead, signed by client officer) asking the lawyer to respond directly to the auditor concerning: - client’s description of the nature & current status of all outstanding & possible claims with which the lawyer has been involved - client’s evaluation of the amount & likelihood of loss or gain for each listed outstanding & possible claim - any unlisted or potential items, or whether the status of each claim or assessment Lawyer Enquiry

13. 21 - 13 Copyright  2003 Pearson Education Canada Inc. If an lawyer refuses to respond or refuses to provide adequate information, the audit opinion will be qualified or denied. Lawyer Enquiry

14. 21 - 14 Copyright  2003 Pearson Education Canada Inc. Review for Subsequent Events ?

15. 21 - 15 Copyright  2003 Pearson Education Canada Inc. Review for Subsequent Events 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period Subsequent events are events or trans- actions having a material effect on the financial statements that occur after the balance sheet date but before field work completion.

16. 21 - 16 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period Types of Subsequent Events 1.events that provide additional evidence about conditions that existed at the balance sheet date (e.g., settlement of liabilities, realiza- tion of assets)

17. 21 - 17 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period 1.events that provide additional evidence about conditions that existed at the balance sheet date (e.g., settlement of liabilities, realiza- tion of assets) Types of Subsequent Events Client financial statements for the period under audit must be adjusted to reflect this subsequent event information.

18. 21 - 18 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period 2. events that occur after the balance sheet date and do not relate to condi- tions that existed at year-end (e.g., bond/stock issue, acquisition, fire/flood loss, major customer/vendor bankruptcy) Types of Subsequent Events

19. 21 - 19 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period 2. events that occur after the balance sheet date and do not relate to condi- tions that existed at year-end disclose These subsequent events must be disclosed in the footnotes of the period under audit. The auditor may also consider: - pro forma financial statements Types of Subsequent Events

20. 21 - 20 Copyright  2003 Pearson Education Canada Inc. Review for Subsequent Events What auditing procedures will identify subsequent events?

21. 21 - 21 Copyright  2003 Pearson Education Canada Inc. Subsequent Events Auditing Procedures Near field work completion, auditors should: - read post-balance sheet interim statements and records Ace Company Financial Statements For the month of January 2005

22. 21 - 22 Copyright  2003 Pearson Education Canada Inc. Subsequent Events Auditing Procedures Near field work completion, auditors should: - read post-balance sheet interim statements and records - obtain a management representation letter and discuss with management: ~ contingent liabilities ~ significant changes in owners’ equity ~ items accounted for on tentative data ~ unusual adjustments in subsequent period

23. 21 - 23 Copyright  2003 Pearson Education Canada Inc. Subsequent Events Auditing Procedures Near field work completion, auditors should: - read post-balance sheet interim statements and records - obtain a management representation letter - read minutes of board and shareholder meetings that have occurred since year-end

24. 21 - 24 Copyright  2003 Pearson Education Canada Inc. Joe Lawyer Jill Auditor, CA Subsequent Events Auditing Procedures Near field work completion, auditors should: - read post-balance sheet interim statements and records - obtain a management representation letter - read minutes of board and shareholder meetings that have occurred since year-end - obtain letter from client’s lawyer Canada 48

25. 21 - 25 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period What responsibility does the auditor have for subsequent events that occur between field work completion and the issue date?

26. 21 - 26 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period - the auditor is not responsible for dis- covering subsequent events during this period What responsibility does the auditor have for subsequent events that occur between field work completion and the issue date ?

27. 21 - 27 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period - the auditor is not responsible for dis- covering subsequent events during this period - if, however, auditors learn of a subsequent event during this period, they are responsible for ensuring correcting accounting for it What responsibility does the auditor have for subsequent events that occur between field work completion and the issue date?

28. 21 - 28 Copyright  2003 Pearson Education Canada Inc. If auditors learn of a subsequent event during this period, they are responsible for its disclosure. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period The auditors then have two options: - expand all subsequent events tests to the date of the event and change the report date to the date of the event (e.g., 2/21)

29. 21 - 29 Copyright  2003 Pearson Education Canada Inc. If auditors learn of a subsequent event during this period, they are responsible for its disclosure. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period The auditors then have two options: - expand all subsequent events tests to the date of the event and change the report date to the date of the event (e.g., 2/21) - restrict testing only to matters relating to the new event and dual-date the report: Taylor & Tower, CAs February 14, 2005, except for Note 3, as to which the date is February 21, 2005

30. 21 - 30 Copyright  2003 Pearson Education Canada Inc. 12/31 2/14 2/28 balance sheet field work report date completion issue date period under audit subsequent events period The auditors then have two options: - expand all subsequent events tests to the date of the event and change the report date to the date of the event (e.g., 2/21) - restrict testing only to matters relating to the new event and dual-date the report What are the trade-offs between these options?

31. 21 - 31 Copyright  2003 Pearson Education Canada Inc. What responsibility does the auditor have for subsequent events that occur after the issue date? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

32. 21 - 32 Copyright  2003 Pearson Education Canada Inc. What responsibility does the auditor have for subsequent events that occur after the issue date? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date Auditors have no obligation to perform additional procedures after the report date unless they become aware of facts that existed at the report date.

33. 21 - 33 Copyright  2003 Pearson Education Canada Inc. What responsibility does the auditor have for subsequent events that occur after the issue date? With regard to this information, auditors should determine: - did the information exist at the report date? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

34. 21 - 34 Copyright  2003 Pearson Education Canada Inc. What responsibility does the auditor have for subsequent events that occur after the issue date? With regard to this information, auditors should determine: - did the information exist at the report date? - is the information reliable? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

35. 21 - 35 Copyright  2003 Pearson Education Canada Inc. What responsibility does the auditor have for subsequent events that occur after the issue date? With regard to this information, auditors should determine: - did the information exist at the report date? - is the information reliable? - would the audit report have been different if the informa- tion had been available prior to the report date? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

36. 21 - 36 Copyright  2003 Pearson Education Canada Inc. What responsibility does the auditor have for subsequent events that occur after the issue date? With regard to this information, auditors should determine: - did the information exist at the report date? - is this information reliable? - would the audit report have been different if the informa- tion had been available prior to the report date? - are persons still relying on the audit report? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

37. 21 - 37 Copyright  2003 Pearson Education Canada Inc. If the answer to any of these questions is no, the auditors do not need to take any action. With regard to this information, auditors should determine: - did the information exist at the report date? - is this information reliable? - would the audit report have been different if the informa- tion had been available prior to the report date? - are persons still relying on the audit report? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

38. 21 - 38 Copyright  2003 Pearson Education Canada Inc. If the answer to all of these questions is yes, the auditors must act to prevent future reliance on the audit report. With regard to this information, auditors should determine: - did the information exist at the report date? - is this information reliable? - would the audit report have been different if the informa- tion had been available prior to the report date? - are persons still relying on the audit report? period subsequent events period under audit 12/31 2/14 2/28 balance sheet field work report date completion issue date

39. 21 - 39 Copyright  2003 Pearson Education Canada Inc. How do auditors prevent future reliance on a previously-issued audit report? Auditors’ Report ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd ggsfggsfrrff fsfftershj dytudtyiuhhfd fjty7yh rngag dgaroihaongn faidfnad faosdfnandsfafd

40. 21 - 40 Copyright  2003 Pearson Education Canada Inc. the client must revise and reissue the financial statements How do auditors prevent future reliance on a previously-issued audit report? If the financial statement effect of the subsequently-discovered information can be determined promptly

41. 21 - 41 Copyright  2003 Pearson Education Canada Inc. the client must notify persons known to be (and those likely to be) relying on the financial statements How do auditors prevent future reliance on a previously-issued audit report? If the financial statement effect of the subsequently-discovered information cannot be determined promptly

42. 21 - 42 Copyright  2003 Pearson Education Canada Inc. What should the auditor do if the client refuses to reissue the statements or contact those relying on the auditors’ report? revise and reissue? NO!

43. 21 - 43 Copyright  2003 Pearson Education Canada Inc. What should the auditor do if the client refuses to reissue the statements or contact those relying on the auditors’ report? -first, notify the audit committee, or other body, such as the board, of management’s refusal

44. 21 - 44 Copyright  2003 Pearson Education Canada Inc. What should the auditor do if the client refuses to reissue the statements or contact those relying on the auditors’ report? - first, notify the audit committee, etc. of management’s refusal - then: ~ inform client management that the audit report may no longer be associated with the statements

45. 21 - 45 Copyright  2003 Pearson Education Canada Inc. What should the auditor do if the client refuses to reissue the statements or contact those relying on the auditors’ report? - first, notify the audit committee, etc. of management’s refusal - then: ~ inform client management that the audit report may no longer be associated with the statements ~ consider obtaining legal advice

46. 21 - 46 Copyright  2003 Pearson Education Canada Inc. What should the auditor do if the client refuses to reissue the statements or contact those relying on the auditors’ report? - first, notify the audit committee, etc. of management’s refusal - then: ~ inform client management that the audit report may no longer be associated with the statements ~ consider obtaining legal advice ~ consider the appropriateness of other actions such as withdrawing

47. 21 - 47 Copyright  2003 Pearson Education Canada Inc. Client Representation Letter ?

48. 21 - 48 Copyright  2003 Pearson Education Canada Inc. Client Representation Letter The auditor must obtain a letter from the client documenting the client’s represen- tations during the engagement. % $@!!!} { @@?”{ +&*##@ Client Representation Letter % $@!!!} { @@?”{ +&*##@

49. 21 - 49 Copyright  2003 Pearson Education Canada Inc. Client Representation Letter The auditor must obtain a letter from the client documenting the client’s represen- tations during the engagement. The primary purposes are to: - confirm and document oral statements - reduce auditor-client misunderstanding - remind management of its responsibili- ty for the financial statements

50. 21 - 50 Copyright  2003 Pearson Education Canada Inc. Client Representation Letter The auditor must obtain a letter from the client documenting the client’s represen- tations during the engagement. The primary purposes are to: - confirm and document oral statements - reduce auditor-client misunderstanding - remind management of responsibilities The letter should be signed by the client CFO and CEO and dated with the field work completion date.

51. 21 - 51 Copyright  2003 Pearson Education Canada Inc. Client Representation Letter If the client refuses to give the auditor a representation letter, the auditor must qualify or deny the opinion. probable

52. 21 - 52 Copyright  2003 Pearson Education Canada Inc. Final Audit Steps 1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report.

53. 21 - 53 Copyright  2003 Pearson Education Canada Inc. Final Audit Steps 1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report. 2. The auditor prepares the management letter. ?

54. 21 - 54 Copyright  2003 Pearson Education Canada Inc. Final Audit Steps 1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report. 2. The auditor prepares the management letter. recommendations for improving the client business

55. 21 - 55 Copyright  2003 Pearson Education Canada Inc. Final Audit Steps 1. Incorporating all audit evidence, materiality, and judgment, the auditor draws overall conclusions and prepares the audit report. 2. The auditor prepares the management letter. 3. The auditor communicates the results to the audit committee/management and gives them the audit report and management letter.

56. 21 - 56 Copyright  2003 Pearson Education Canada Inc. GAAS suggests that auditors to communicate (oral or written) to audit committees, etc.: - the auditor’s responsibilities under GAAS

57. 21 - 57 Copyright  2003 Pearson Education Canada Inc. GAAS suggests that auditors communicate (oral or written) to audit committees, etc.: - the auditor’s responsibilities under GAAS - significant accounting policies selected, & judgments used by management

58. 21 - 58 Copyright  2003 Pearson Education Canada Inc. GAAS suggests that auditors communicate (oral or written) to audit committees, etc.: - the auditor’s responsibilities under GAAS - significant accounting policies selected, & judgments used by management - audit planning

59. 21 - 59 Copyright  2003 Pearson Education Canada Inc. GAAS suggests that auditors communicate (oral or written) to audit committees, etc.: - the auditor’s responsibilities under GAAS - significant accounting policies selected, & judgments used by management - audit planning - disagreements with management

60. 21 - 60 Copyright  2003 Pearson Education Canada Inc. GAAS suggests that auditors communicate (oral or written) to audit committees, etc.: - the auditor’s responsibilities under GAAS - significant accounting policies selected, & judgments used by management - audit planning - disagreements with management - difficulties in performing the audit

61. 21 - 61 Copyright  2003 Pearson Education Canada Inc. GAAS suggests that auditors communicate (oral or written) to audit committees, etc.: - the auditor’s responsibilities under GAAS - significant accounting policies selected, & judgments used by management - audit planning - disagreements with management - difficulties in performing the audit - consultations with other accountants

62. 21 - 62 Copyright  2003 Pearson Education Canada Inc. What are the required communications with the audit committee, etc.?

63. 21 - 63 Copyright  2003 Pearson Education Canada Inc. What are other suggested communications with the audit committee? - significant deficiencies in internal control - misstatements that are other than trivial - illegal or possible illegal acts