Chapter 24

Audit Completion

Copyright 2014 Pearson Education

Design and perform audit tests related to

presentation and disclosure audit objectives.
Conduct a review for contingent liabilities and
commitments.
Obtain and evaluate letters from the clients
attorneys.
Conduct a post-balance-sheet review for
subsequent events.

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Design and perform the final steps in the

evidence-accumulation segment of the audit.
Integrate the audit evidence gathered and
evaluate the overall audit results.
Communicate effectively with the audit
committee and management.
Identify the auditors responsibilities when
facts affecting the audit report are discovered
after its issuance.
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1
Design and perform audit tests related to
presentation and disclosure audit objectives.

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2
Conduct a review for contingent liabilities and
commitments.

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A contingent liability is a potential future

obligation to an outside party for an
unknown amount resulting from activities
that have already taken place.

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Pending litigation for patent infringement,

product liability, or other actions
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances of outstanding letters of credit

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Audit Procedures

Management
Inquiry

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Review BOD
Meeting
Minutes

Review
Revenue
Agent
Reports

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Audit Procedures

Review
legal invoices

Obtain
attorney
letters
re: litigation

Examine
Letters of
Credit

Review Audit work papers for signs of contingencies

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3
Obtain and evaluate letters from the clients
attorneys.

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A list including: (1) pending threatened litigation

and (2) asserted or unasserted claims or
assessments with which the attorney
has had involvement.
Request that the attorney furnish information
or comment about the progress of each item listed.

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A request of the law firm to identify any unlisted

pending or threatened legal actions or a
statement that the clients list is complete.
A statement informing the attorney of the attorneys
responsibility to inform management of legal matters
requiring disclosure in the financial statements
and to respond directly to the auditor.

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Rules require attorneys serving public companies

to report material violations of federal securities
laws committed by the company.

The American Bar Association amended its

attorney-client confidentiality rules to permit
attorneys to breach confidentiality if a client
is committing a crime or fraud.
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4
Conduct a post-balance-sheet review for
subsequent events.

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 Those that have a direct effect

on the financial statements
and require adjustment

Those that do not have a direct

effect on the financial statements
but for which disclosure is required

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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
Disposal of equipment not being used in
operations at a price below the current
book value

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Issuance

of bonds or equity securities

Decline in the market value of inventory
as a consequence of government action
barring further sale of a product
Uninsured loss of inventories as a result
of fire
A merger or an acquisition

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Two categories of audit procedures

for the subsequent events review:
1. Procedures normally integrated as
a part of the verification of year-end
account balances.
2. Procedures performed specifically for
the purpose of discovering events or
transactions that must be recognized
as subsequent events.
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Review records prepared subsequent

to the balance sheet date
Review internal statements prepared
subsequent to the balance sheet date
Examine minutes issued subsequent
to the balance sheet date
Correspond with attorneys
Inquire of management
Obtain a letter of representation

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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
Example: An auditor returned to the clients premises to
perform audit tests pertaining only to the acquisition and
completes those tests on March 31. The audit report will
be dual-dated as follows: March 11, 2013, except for note
17, which is dated March 31, 2013.
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5
Design and perform the final steps in the
evidence-accumulation segment of the audit.

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The five types of final evidence accumulation

1.
2.
3.
4.

Perform final analytical procedures.

Evaluate the going concern assumption.
Obtain a management representation letter.
Consider supplementary information in
relation to financial statements as a whole.
5. Read other information in the annual report.
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Partner reads financial statements and footnotes

Considers
adequacy of
evidence

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Unusual or
unexpected
balances or
relationships

Unusual
items not
previously
identified

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Evaluate a clients ability to continue operating

another year

Assess as
part of initial
planning

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Update
based on
audit results

Use analytical
procedures &
make final
assessment

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Purposes of the letter:

1. To impress upon management its responsibility
for the assertions in the financial statements.
2. To remind management of potential misstatements
or omissions in the financial statements.
3. To document the responses from management
to inquiries about various aspects of the audit.

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Auditing standards suggest four categories of

specific matters:

Responsibility
for financial
statements

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Completeness
of
information

Recognition,
measurement,
and disclosure

Recording and
disclosing
subsequent
events

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6
Integrate the audit evidence gathered and
evaluate the overall audit results.

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 Sufficient appropriate evidence

Evidence supports auditors opinion

Financial statement disclosures

Audit documentation review

Independent review
Summary of evidence evaluation

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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.

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7
Communicate effectively with the audit
committee and management.

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 Communicate fraud and illegal acts

Communicate internal control deficiencies
Other communication with audit committee

Management letters

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8
Identify the auditors responsibilities when
facts affecting the audit report are
discovered after its issuance.

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Copyright

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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